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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[_] Preliminary Proxy Statement [_] CONFIDENTIAL, FOR USE OF THE
COMMISSION ONLY (AS PERMITTED BY
RULE 14A-6(E)(2))
[X] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12
CORDANT TECHNOLOGIES, INC.
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(Name of Registrant as Specified In Its Charter)
- - --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which
the filing fee is calculated and state how it was determined):
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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[_] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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Notes:
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TABLE OF CONTENTS
<TABLE>
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PAGE
<S> <C>
NOTICE OF ANNUAL MEETING.................................................
PROXY STATEMENT AND SOLICITATION OF PROXIES.............................. 1
ELECTION OF DIRECTORS.................................................... 2
VOTING SECURITIES AND PRINCIPAL HOLDERS THEREOF.......................... 6
SECURITY OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS................... 7
EXECUTIVE COMPENSATION................................................... 8
TERMINATION OF EMPLOYMENT AND CHANGE OF CONTROL AGREEMENTS............... 13
BOARD COMPENSATION AND MANAGEMENT DEVELOPMENT COMMITTEE AND REPORT ON
EXECUTIVE COMPENSATION.................................................. 13
PROPOSAL TO APPROVE AMENDMENTS TO THE CORDANT TECHNOLOGIES INC. AMENDED
AND RESTATED 1996 STOCK AWARDS PLAN..................................... 18
RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITOR....................... 22
EXHIBIT A, CORDANT TECHNOLOGIES INC. AMENDED AND RESTATED 1996 STOCK
AWARDS PLAN............................................................. A-1
EXHIBIT B, FINANCIAL INFORMATION......................................... F-1
MANAGEMENT'S REPORT ON FINANCIAL STATEMENTS............................ F-2
REPORT ON ERNST & YOUNG LLP, INDEPENDENT AUDITORS...................... F-3
CONSOLIDATED STATEMENTS OF INCOME...................................... F-4
CONSOLIDATED BALANCE SHEETS............................................ F-6
CONSOLIDATED STATEMENTS OF CASH FLOWS.................................. F-8
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY........................ F-9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS............................. F-10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS......................................................... F-30
SELECTED FINANCIAL DATA................................................ F-46
</TABLE>
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CORDANT TECHNOLOGIES INC.
15 W. SOUTH TEMPLE
SUITE 1600
SALT LAKE CITY, UT 84101-1532
[LOGO OF CORDANT TECHNOLOGIES INC. APPEARS HERE]
SEPTEMBER 11, 1998
Dear Stockholder:
We invite you to the Annual Meeting of Stockholders of Cordant Technologies
Inc., which will be held on Thursday, October 22, 1998, at the Marriott Hotel,
75 South West Temple, Salt Lake City, Utah, commencing at 11:30 a.m. local
time. Information about the matters to be voted upon at the meeting is in the
enclosed formal Notice of Meeting and Proxy Statement.
It is important that your shares be represented at this meeting whether or not
you personally plan to attend. Please sign, date and return your proxy promptly
in the enclosed envelope. This will not limit your right to vote in person or
attend the meeting.
The Company's audited financial statements for the fiscal year ended June 30,
1998, management's discussion and analysis of financial condition and results
of operations, management's report on financial statements, report of
independent auditors and other related information are included in Exhibit B of
this Notice of Annual Meeting and Proxy Statement. The Company's Summary Annual
Report is also enclosed.
[SIGNATURE OF JAMES R. WILSON APPEARS HERE]
James R. Wilson
Chairman of the Board, President
and Chief Executive Officer
<PAGE>
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS TO BE HELD ON
THURSDAY, OCTOBER 22, 1998
To the Stockholders:
The Annual Meeting of Stockholders of Cordant Technologies Inc. (the
"Company") will be held on Thursday, October 22, 1998 at the Marriott
Hotel, 75 South West Temple, Salt Lake City, Utah, at 11:30 a.m. local
time, to consider and vote upon:
1. Election of three directors (see page 2);
2. Approve proposed amendments to the Cordant Technologies Inc. Amended and
Restated 1996 Stock Awards Plan (see page 18);
3. Ratification of appointment of Ernst & Young LLP as the Company's
independent auditors for the fiscal year ending December 31, 1998 (see
page 22); and
4. Any other business that may properly come before the meeting.
The close of business on September 1, 1998, has been fixed as the record
date for the meeting. All stockholders of record on that date are entitled
to be present and to vote at the meeting.
Attendance at the Annual Meeting will be limited to stockholders of record,
beneficial owners of Company common stock entitled to vote at the meeting
having evidence of ownership, the authorized representative (one only) of
an absent stockholder, and invited guests of management. Any person
claiming to be an authorized representative of a stockholder must, upon
request, produce written evidence of such authorization.
The meeting will be conducted pursuant to the Company's By-Laws and rules
of order prescribed by the chairman of the meeting.
For a ten-day period prior to the date of the 1998 Annual Meeting, a list
of stockholders entitled to vote will be open for examination during normal
business hours at the Company's principal offices, 15 W. South Temple, Salt
Lake City, Utah, and may be examined by any stockholder for any purpose
germane to the meeting.
September 11, 1998
By Order of the Board of Directors,
Edwin M. North
Vice President and Corporate Secretary
<PAGE>
CORDANT TECHNOLOGIES INC.
15 W. South Temple
Suite 1600
Salt Lake City, UT 84101-1532
PROXY STATEMENT AND SOLICITATION OF PROXIES
September 11, 1998
This Proxy Statement is furnished in connection with the solicitation by the
Company's Board of Directors of proxies for use at its Annual Meeting of
Stockholders to be held on Thursday, October 22, 1998, and at any adjournment
thereof (the "1998 Annual Meeting").
Shares represented in person or by properly executed and unrevoked proxies
received in proper form in time for the 1998 Annual Meeting will be voted.
Shares will be voted in accordance with stockholders' instructions in the
accompanying proxy. If any such proxy contains no instructions, the shares will
be voted in accordance with the directors' recommendations, which are noted
herein. Any proxy given may be revoked at any time before it is voted at the
meeting.
On September 1, 1998, the record date for the 1998 Annual Meeting, there were
36,555,698 shares of $1.00 par value common stock outstanding, each entitled to
one vote, and there is no cumulative voting. The Company has no other class of
equity securities outstanding.
Pursuant to the amended and restated By-Laws of the Company ("By-Laws"), an
inspector of election and an alternate have been appointed by the Board of
Directors to serve at the 1998 Annual Meeting. In the event the inspector or
the alternate shall not be present at the meeting, the chairman of the meeting
shall appoint an inspector in advance of any voting at such meeting. The
chairman of the meeting shall fix and announce at the meeting the date and time
of the opening and the closing of the polls for each matter upon which the
stockholders will vote at the meeting. The owners of a majority of the
outstanding shares entitled to vote are required for a quorum for the
transaction of business at the 1998 Annual Meeting. Under Delaware corporation
law, abstentions, withheld votes and broker no-votes (i.e., shares held by a
broker or nominee which are represented at the meeting, but with respect to
which such broker or nominee is not empowered to vote on a particular proposal
or proposals) will be considered part of the quorum. Directors will be elected
by a plurality of the votes cast at the 1998 Annual Meeting, which means that
abstentions, withheld votes and broker no-votes will not affect the election of
the candidates. All other proposals, including the: (i) proposed amendments to
the Cordant Technologies Inc. Amended and Restated 1996 Stock Awards Plan and
(ii) ratification of the appointment of Ernst & Young LLP as the Company's
independent auditors, require the favorable vote of the holders of a majority
of the shares present and entitled to vote on the particular proposal at the
1998 Annual Meeting to pass. Therefore, abstentions as to a particular proposal
will have the same effect as votes against such proposal and broker no-votes
will not be counted as votes for or against such proposal, and will not be
included in counting the number of votes necessary for approval of the
proposal. The approximate mailing date of the Proxy Statement and Proxy to
stockholders is September 11, 1998.
The Company will bear the cost of the solicitation. In addition to solicitation
by mail, the Company will request banks, brokers and other custodian nominees
and fiduciaries to supply proxy material to the beneficial owners of the
Company's common stock of whom they have knowledge, and will reimburse them for
their expenses in so doing. Certain directors, officers and other employees of
the Company, not specifically employed for the purpose, may solicit proxies,
without additional remuneration therefor, by personal interview, mail,
telephone or telegraph. In addition, the Company has retained D. F. King & Co.,
Inc. to assist in the solicitation for a fee of $5,000 plus expenses.
1
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1. ELECTION OF DIRECTORS
The Board of Directors is currently comprised of eleven directors. By
resolution, in accordance with the By-Laws of the Company, the Board of
Directors' membership was increased from nine to eleven directors effective
June 20, 1998. Steven G. Lamb and David J. Lesar were elected by the Board to
fill the vacancies created by the expansion of the Board's membership and to
serve in the class of Directors for which term of office expires at the 2000
Annual Meeting. The Company's Restated Certificate of Incorporation and By-Laws
provide for the Board to be divided into three classes. Each class serves for a
term of three years. At the 1998 Annual Meeting, Edsel D. Dunford, Robert H.
Jenkins, and James R. Wilson will stand for election as nominees for directors
for a term to expire at the 2001 Annual Meeting. Robert H. Jenkins is standing
for election to fill the vacancy created by U. Edwin Garrison's retirement from
the Board.
If any nominee should become unavailable, an event the Board of Directors does
not anticipate, it is intended that such shares will be voted for such
substitute nominee as may be selected by the Board of Directors, or the Board
may reduce the number of directors. Except for Robert H. Jenkins, all nominees
are presently serving as directors and have consented to being named herein and
to serve if elected.
NOMINEES FOR DIRECTORS
THREE-YEAR TERM EXPIRING AT THE 2001 ANNUAL MEETING
EDSEL D. DUNFORD, age 63, was elected a director of the Company in January
1995. He served as President and Chief Operating Officer of TRW Inc. from 1991
until his retirement in December of 1994. He served as Executive Vice President
and General Manager of TRW Space and Defense Business from 1987 to 1991. Mr.
Dunford is a director of Cooper Tire & Rubber Company, Howmet International
Inc., and National Steel Corporation, and is a trustee at the University of
California at Los Angeles. Mr. Dunford holds a Bachelor of Science degree from
the University of Washington and a Masters of Engineering degree from the
University of California at Los Angeles.
ROBERT H. JENKINS, age 55, is the Chairman of the Board, President and Chief
Executive Officer of Sundstrand Corporation, a position held since 1995.
Sundstrand designs, manufactures and sells proprietary technology-based
components and subsystems serving world industrial and aerospace markets. He is
a director of Sundstrand Corporation, AK Steel Holding Corporation, an
integrated steel producer of carbon flat-rolled steel, and Little Rapids
Corporation, a paper reseller and provider of paper converting services. Mr.
Jenkins holds a Bachelor of Science degree from the University of Wisconsin.
JAMES R. WILSON, age 57, has served as Chairman of the Board, President and
Chief Executive Officer since October 1995, served as President and Chief
Executive Officer from October 1993 to October 1995. He has served as a
director of the Company since October 1993. He joined the Company in 1989 as
Vice President and Chief Financial Officer and became Executive Vice President
and Chief Financial Officer in 1992. Mr. Wilson is a director of The BFGoodrich
Company, Cooper Industries, Inc., First Security Corporation and Howmet
International Inc., and is a member of the Board of Trustees of the College of
Wooster. He holds a Bachelors degree from the College of Wooster and a Masters
of Business Administration from Harvard University.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE NOMINEES.
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DIRECTORS CONTINUING IN OFFICE
THREE-YEAR TERM EXPIRING AT THE 2000 ANNUAL MEETING
MICHAEL P.C. CARNS, age 61, was elected a director of the Company in January
1995. General Carns retired as Vice Chief of Staff of the United States Air
Force in 1994 with 36 years of distinguished military service. General Carns is
President and Executive Director of the Center of International Political
Economy, a policy research group and is a director of Mission Research
Corporation, an electronics firm, and is a member of the Board of Trustees of
the Monterey Institute of International Studies. He holds a Bachelor of Science
degree from the United States Air Force Academy and a Masters of Business
Administration from Harvard University
STEVEN G. LAMB, age 42, was elected a director of the Company in August 1998.
He is the President and Chief Operating Officer of Case Corporation, a
manufacturer of farm and light to medium size construction equipment, a
position held since 1997. Joining Case in 1993, he served in various executive
positions including Executive Vice President and Chief Operating Officer. Mr.
Lamb holds a Bachelor of Science degree from the United States Military Academy
and a Masters of Business Administration from Harvard University.
DAVID J. LESAR, age 45, was elected a director of the Company in August 1998.
He is the President and Chief Operating Officer of Halliburton Company, a
global energy, engineering and services company, a position held since 1997.
Joining Halliburton in 1993, he held various executive positions including
Executive Vice President and Chief Financial Officer. Mr. Lesar holds a
Bachelors of Science degree and Masters of Business Administration from the
University of Wisconsin.
D. LARRY MOORE, age 62, was elected a director of the Company in June 1997. He
is the retired President and Chief Operating Officer of Honeywell, Inc., an
electronic automation and control systems manufacturer, a position held from
April 1993 to June 1997. Joining Honeywell in 1986, he served in various
executive positions including Executive Vice President and Chief Operating
Officer, 1990 to 1993. Dr. Moore is a director of Geon Company, Howmet
International Inc., and Reynolds Metals Company. Dr. Moore holds a doctorate in
Economics from Arizona State University and Bachelor of Science degree and
Masters of Business Administration from the University of Arizona.
THREE-YEAR TERM EXPIRING AT THE 1999 ANNUAL MEETING
NEIL A. ARMSTRONG, age 68, became a director of the Company in October of 1989.
He serves as Chairman of AIL Systems, Inc. an electronics and systems company
with sales primarily to the federal government. He is a director of CINergy,
Inc., Cincinnati Milacron Inc., Eaton Corporation, RMI Titanium Co., and USX
Corporation. He holds a Bachelor of Science degree in Aeronautical Engineering
from Purdue University and a Master of Science degree in Aerospace Engineering
from the University of Southern California.
CHARLES S. LOCKE, age 69, is the retired Chairman of the Board and Chief
Executive Officer of Morton International, Inc., a manufacturer and marketer of
specialty chemicals and salt. He served as Chairman of the Board and Chief
Executive Officer of the Company from 1980 to 1989. Since then, he has
continued as a non-employee director of the Company. He is a director of Avon
Products, Inc., NICOR, Inc. and its subsidiary, Northern Illinois Gas Company,
and Whitman Corporation. Mr. Locke holds Bachelor of Business Administration
and Master of Science degrees from the University of Mississippi.
WILLIAM O. STUDEMAN, age 58, was elected a director of the Company in January
1996. Admiral Studeman retired from the Navy in 1995 after a distinguished 33
year career including serving as Deputy Director of Central Intelligence from
1992 until his retirement. Admiral Studeman is the Vice President and Deputy
General Manager, TRW Systems and Technology Group (Intelligence Programs), and
a director of Paracel Corporation. He holds a Bachelor of Arts degree from the
University of the South and a Masters of Arts from George Washington
University.
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DONALD C. TRAUSCHT, age 64, was elected a director of the Company in August
1993. Since 1996 he has served as Chairman of BW Capital Corporation, a private
investment company. From 1993 to 1995 he served as Chairman & Chief Executive
Officer of Borg Warner Security Corporation, a supplier of security services.
Mr. Trauscht joined Born Warner in 1967 and in 1990 he became President of Borg
Warner Corporation, a diversified manufacturer and service company. In 1992 he
became Chairman and Chief Executive Officer of that company. He is a director
of Blue Bird Corporation, Borg Warner Security Corporation, Wynn's
International Company, ESCO Electronics Corporation, Baker-Hughes Inc., and
Hydrac International Corporation. Mr. Trauscht holds a Bachelor of Science
degree from St. Mary's University and a Master of Business Administration from
the University of Chicago.
COMMITTEES OF THE BOARD
During 1998, the Board of Directors reorganized the Committees of the Board and
amended the Committee Charters. A Finance Committee, to become operative in
October 1998, was added increasing the number of Board Committees to the
following five: Audit, Compensation and Management Development, Nominating and
Board Governance, Finance and Executive Committees.
The Audit Committee recommends to the Board the independent auditors to be
selected to audit the Company's annual financial statements, reviews the fees
charged for such audits and for any special assignments given the auditors and
appraises the independence and general performance of the independent auditors.
The Committee reviews the annual audit and its scope, including the independent
auditors' comment letter and management's responses and the implementation of
management's responses; possible violations of the Company's business ethics
and conflict of interest policies; any major accounting changes made or
contemplated; and the effectiveness and efficiency of the Company's internal
audit program. In addition, the Committee confirms that no restrictions have
been imposed by Company personnel on the scope of the independent auditors' and
the internal auditors' examinations. The Committee receives any reports
pursuant to the Private Securities Litigation Reform Act of 1995 of independent
auditors with respect to illegal acts that have been detected or otherwise come
to its attention. Also, the Committee meets with the Senior Vice President and
General Counsel to assess the adequacy and effectiveness of corporate policies,
procedures and monitoring to insure compliance with legal and regulatory
requirements and detecting and preventing violations of the law. Members of
this Committee are Messrs. Donald C. Trauscht (Chairman), Neil A. Armstrong,
Michael P.C. Carns, and William O. Studeman. The Committee met three times in
fiscal year 1998. Each Committee member attended 75 percent or more of the
Committee meetings while a member of the Committee.
The Compensation and Management Development Committee annually reviews and
reports to the Board on the Chairman of the Board, President and Chief
Executive Officer's performance. The Committee makes recommendations to the
Board with respect to the creation and amendment of compensation, retirement
and other benefit plans of the Company and its subsidiaries. The Committee
reviews and approves the Company's executive compensation policies and reviews
and approves the compensation actions for the Chairman of the Board, President
and Chief Executive Officer, Executive Officers and other key employees. The
Committee administers the Company's short and long-term executive bonus
programs, including the approval of performance goals, and the stock option and
awards plans. The Committee reviews and approves the Committee's report for the
proxy statement, outside compensation consultants, and determines the Company's
policy concerning the deductibility of the Company's compensation under the
Internal Revenue Code. Members of the Committee are Messrs. Charles S. Locke
(Chairman), Edsel D. Dunford, D. Larry Moore, and Donald C. Trauscht. The
Committee met two times and took action by written unanimous consent two times
in fiscal year 1998. Each Committee member attended 75 percent or more of the
Committee meetings while a member of the Committee. The Committee's report on
Executive Compensation is set forth below.
The Nominating and Board Governance Committee reviews the size, structure, and
composition of the Board, identifies and evaluates criteria for selecting
directors, evaluates individuals for potential membership on the Board,
including nominees, makes recommendations to the Board of individuals to fill
vacancies or new positions, makes recommendations to the Board of individuals
to be proposed
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to shareholders for election to the Board at annual meetings of stockholders
and makes recommendations to the Board regarding Committee structures and
responsibilities. The Committee also reviews and makes recommendations to the
Board as to the compensation and benefits of non-employee directors and Board
committee members. Periodically, the Committee will report to the Board on the
assessment of the effectiveness of the Board's performance. Members of the
Committee are Messrs. Edsel D. Dunford (Chairman), U. Edwin Garrison, Charles
S. Locke, and D. Larry Moore. They met three times in fiscal year 1998. Each
Committee member attended 75 percent or more of the Committee meetings while a
member of the Committee.
The Finance Committee will make recommendations to the Board regarding the
planning of the capital structure of the Company and the raising of long-term
capital including the incurrence or redemption of long-term debt. The Committee
will make recommendations to the Board regarding dividend policy and the
issuance or repurchase of the Company's capital stock. The Committee will act
and report to the Board regarding the appointment or changes of investment
managers, trustees, actuaries, or administrative committees and changes in
investment guidelines or actual assumptions with respect to the Company's
pension and savings plans. Annually, the Committee will review and report to
the Board with respect to the investment performance and actuarial assumptions
of the Company's retirement and savings plans. The Committee will also approve
material hedging transactions and review the Company's corporate income tax
practices and investments of cash reserves.
The Executive Committee may exercise all of the powers and authority of the
Company's Board, except that the Committee does not have the power to amend the
Company's By-Laws or Certificate of Incorporation (except to fix the
designations, preferences and other terms of any of its preferred stock),
authorize the issuance of stock, declare dividends, adopt an agreement of
merger or consolidation, adopt a certificate of ownership and merger under
Delaware law, or recommend to Company stockholders the sale, lease or exchange
of all or substantially all of its property and assets, a dissolution of the
Company or a revocation of a dissolution. Members of this Committee are Messrs.
James R. Wilson (Chairman), U. Edwin Garrison, and Charles S. Locke. The
Committee took action by written unanimous consent two times in fiscal year
1998.
BOARD MEETING ATTENDANCE AND COMPENSATION OF DIRECTORS
The Company's Board of Directors met six times during fiscal year 1998. All
directors were present for 75 percent or more of the total meetings of the
Board while they were Board members.
During 1998, Board compensation practices were reviewed, with the assistance of
an independent compensation consultant, with respect to providing compensation
at levels to meet competitive conditions for the retention and recruitment of
qualified individuals to serve as directors on the Company's Board of
Directors. As the result of such review, the Board compensation program was
amended effective July 1, 1998, providing an annual retainer of $20,000 be paid
to directors in the form of restricted stock grants to align a portion of a
directors' compensation with the performance of the Company's common stock.
Such restricted stock grants are subject to stockholders approving amendments
to the Company's Amended and Restated 1996 Stock Awards Plan from which such
stock grants are to be made. The stock-based retainer is made in addition to
the Company's annual $30,000 cash retainer paid to non-employee directors. A
fee of $1,000 and travel expenses are paid for each meeting attended. Effective
July 1, 1998, committee chairmen will also receive an annual retainer of
$3,000. Directors who are employees of the Company receive no compensation for
their services as directors. Mr. James R. Wilson is the only employee serving
as a director.
The Company maintains a Deferred Fees Plan under which non-employee directors
may elect to have payment of part or all of their directors' compensation
deferred until such time as they cease to be a director. The Plan permits
directors the option of electing the deferral of their directors' fees into a
cash or phantom stock credit account. Amounts credited to the cash account are
credited with increments (similar to interest), and amounts credited to the
phantom stock account are credited with amounts reflecting the change in the
price of the Company's common stock and payment of dividends.
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All distributions of a director's cash or phantom stock account are made only
in cash. Edsel D. Dunford, Charles S. Locke, and D. Larry Moore participate in
the Plan's cash account. Two retired directors with an interest in the Plan are
receiving benefits.
The Company's director restricted stock grants are made contingent upon a
director remaining a member of the Board of Directors. The shares do not vest
until the director's retirement or in the event of disability or death or
change in control of the Company. In the event a director resigns from the
board or otherwise elects not to stand for election as a director, the
restricted shares granted to such director are forfeited unless 80 percent of
the Board of Directors, then in office, the affected director abstaining,
otherwise takes formal action to waive such forfeiture. During the tenure of
such director's service on the board, the shares are restricted with respect to
transferability, assignability or encumbrance and such restrictions are only
released upon the director's retirement, death or disability unless otherwise
waived by formal action by the Board of Directors. During such time as the
restrictions apply to the Company's common stock granted to the director, the
director has voting rights and receives dividends and such other distributions
or adjustments on such common stock. Director's restricted stock granted
effective July 1, 1998, is contingent upon stockholder approval of amendments
and restatement of the Company's 1996 Stock Awards Plan from which such
restricted stock grants are made.
U. Edwin Garrison, the retired Chairman of the Board and Chief Executive
Officer of the Company, receives the director's fees paid to non-employee
directors. Mr. Garrison, as a retired employee of the Company, participates in
the Pension Plan and Excess Benefit Plan and receives the benefits described on
page 12.
DIRECTOR RETIREMENT AT AGE 70
The By-Laws of the Company provide that, among other qualifications to serve as
a director, a person must not have attained the age of seventy years. The By-
Laws further provide that whenever any director shall cease to be qualified to
serve as a director, his term shall expire, but he shall continue to serve
until his successor is elected and qualified; provided, however, that no
director's term shall so expire if the Board of Directors waives such
qualification.
VOTING SECURITIES AND PRINCIPAL HOLDERS THEREOF
The following table sets forth information as of August 31, 1998, with respect
to the shares of the Company's common stock which are held by persons known to
the Company to be beneficial owners of more than five percent of such stock.
<TABLE>
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<CAPTION>
NAME AND ADDRESS AMOUNT OF NATURE PERCENT OF
OF BENEFICIAL OWNERS OF BENEFICIAL OWNERSHIP/(1)/ CLASS
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<S> <C> <C> <C>
MORGAN STANLEY DEAN WITTER &
CO. SOLE VOTING POWER: 0
1221 AVENUE OF THE AMERICAS SHARED VOTING POWER: 3,065,0832 8.38
NEW YORK, NEW YORK, 10020 SOLE DISPOSITIVE POWER: 0
SHARED DISPOSITIVE POWER: 3,779,352 10.33
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</TABLE>
/(1)/As reported on Schedule 13G or provided by the stockholder.
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The following table shows the Company's common stock beneficially owned as of
September 11, 1998, by each director and nominee for director and each of the
Executive Officers named in the table on page 8, and the aggregate number of
such shares beneficially owned by all directors and Executive Officers of the
Company as a group (as used in this Proxy Statement the term "Executive
Officer" means all officers of the Company designated as Executive Officers by
the Board of Directors). Unless otherwise indicated in the footnotes, each
named person and member of the group has sole voting and investment power with
respect to the shares shown.
SECURITY OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS
<TABLE>
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NAME SHARES BENEFICIALLY OWNED/(1)/,/(2)/
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<S> <C>
NEIL A. ARMSTRONG 2,828/(3)/
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MICHAEL P.C. CARNS 946/(3)/
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RICHARD L. CORBIN 74,316
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ROBERT L. CRIPPEN 23,834
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EDSEL D. DUNFORD 12,428/(3)/
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U. EDWIN GARRISON 143,972/(3)/
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ROBERT H. JENKINS 0
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STEVEN G. LAMB 510/(4)/
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DAVID J. LESAR 510/(4)/
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JOSEPH A. LOMBARDO 135,484
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CHARLES S. LOCKE 5,552/(3)/
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JAMES E. MCNULTY 99,563
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D. LARRY MOORE 1,428/(3)/
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WILLIAM O. STUDEMAN 828/(3)/
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DONALD C. TRAUSCHT 1,228/(3)/
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JAMES R. WILSON 346,078
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ALL DIRECTORS, NOMINEES AND EXECUTIVE
OFFICERS AS A GROUP
(22 PERSONS, INCLUDING THOSE NAMED). 995,886
- - ---------------------------------------------------------------------------
</TABLE>
/(1)/Reflects two-for-one stock split paid as a stock dividend in March 1998.
/(2)/Including shares which may be acquired presently or within 60 days upon
exercise of stock options: Messrs. Corbin 66,866; Crippen 21,666; Garrison
68,000; Lombardo 128,116; McNulty 87,666; Wilson 324,633; and all
directors, nominees and Executive Officers as a group 797,071 shares.
/(3)/Including 428 shares contingently granted July 1, 1998, pursuant to the
Directors' Restricted Stock Program.
/(4)/510 shares contingently granted, August 20, 1998, pursuant to the
Directors' Restricted Stock Program.
No individual's beneficial holdings total more than one percent of the
outstanding shares; the holdings of the group represent 2.7 percent of the
outstanding shares with respect to the most recently concluded fiscal year.
7
<PAGE>
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
To the Company's knowledge based on review of copies of such reports furnished
to the Company and written representations, all Forms 3, 4, and 5 required by
Section 16(a) of the Securities Exchange Act of 1934 have been timely filed
with respect to the most recently concluded fiscal year.
EXECUTIVE COMPENSATION
COMPENSATION OF EXECUTIVE OFFICERS
The Summary Compensation Table sets forth the compensation for the three fiscal
years ended June 30, 1998, 1997, and 1996, both long-term and short-term, for
services in all capacities earned by those individuals who were as of June 30,
1998, (i) the Chief Executive Officer, and (ii) the other four most highly
compensated Executive Officers of the Company.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
------------------- ----------------------
AWARDS PAYOUTS
- - -------------------------------------------------------------------------------------------------------------------------
NAME AND YEAR SALARY BONUS/(1)/ OTHER ANNUAL SECURITIES UNDERLYING LTIP ALL OTHER
PRINCIPAL POSITION COMPENSATION/(2)/ OPTIONS/ SARS # PAYOUTS/(3)/ COMPENSATION/(4)/
- - -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
James R. Wilson
Chairman of the Board, 1998 $575,000 $792,750 $ 0 40,000 $425,000 $4,525
President and Chief Ex- 1997 540,000 583,000 0 70,000 850,000 4,800
ecutive Officer 1996 500,000 330,860 0 70,000 283,271 4,750
- - -------------------------------------------------------------------------------------------------------------------------
Robert L. Crippen
Vice President, Presi- 1998 $290,000 286,260 0 8,000 0 6,002
dent 1997 160,417 150,000 0 19,000 0 423
Thiokol Propulsion 1996 0 0 0 0 0 0
- - -------------------------------------------------------------------------------------------------------------------------
Richard L. Corbin
Senior Vice President 1998 $255,000 250,000 0 8,000 168,000 4,006
and Chief Financial Of- 1997 235,000 209,250 0 15,000 336,000 4,650
ficer 1996 225,000 124,454 0 15,200 0 4,725
- - -------------------------------------------------------------------------------------------------------------------------
James E. McNulty
Executive Vice
President Human 1998 $250,000 243,750 190,234 8,000 146,300 5,875
Resources and Adminis- 1997 225,000 198,450 324,884 15,000 274,000 4,770
tration 1996 207,000 102,000 0 13,400 178,072 4,680
- - -------------------------------------------------------------------------------------------------------------------------
Joseph A. Lombardo
Vice President and Gen-
eral 1998 $248,500 227,528 0 5,150 172,000 5,880
Manager, Space Opera- 1997 240,000 130,388 0 15,000 238,736 4,573
tions 1996 230,000 127,266 0 15,200 227,180 4,300
- - -------------------------------------------------------------------------------------------------------------------------
</TABLE>
/(1)/Bonuses accrued under the Company's Key Executive Bonus Plan are paid after
the fiscal year in which they ar accrued.
/(2)/Amount paid to Mr. McNulty represents Supplemental Cash Payment pursuant to
stock options granted prior to fiscal year 1992.
/(3)/The fiscal year 1998 LTIP payouts were made in August 1998 from the
Company's Key Executive Long-Term Incentive Plan for the plan period July
1, 1995 through June 30, 1998. The fiscal year 1997 and fiscal year 1996
LTIP Payouts were made, respectively, with regard to the three-year Plan
periods ending June 30, 1997 and June 30, 1996. Mr. Crippen participates in
the Plan, but will not be eligible for plan benefits prior to completion of
the three-year Plan period ending June 30, 1999. LTIP payments are made 50
percent in cash and 50 percent Company common stock valued at market on
June 30, 1998. Reflecting the two-for-one stock split paid as a stock
dividend in March 1998, Messrs. Wilson, Lombardo and McNulty received
3,744, 2,104 and 2,430 shares respectively in 1996, Messrs. Wilson, Corbin,
McNulty, and Lombardo, received 7,548, 3,078, 2,080, and 2,194 shares,
respectively in 1997. Messrs. Wilson, Corbin, McNulty, and Lombardo
received 2,209, 1,172, 861, and 1,200 shares, respectively in 1998.
/(4)/The amounts are the Company's matching contributions on behalf of each
named individual under the Company's Employee Savings and Investment Plan,
a 401(k) plan. Amounts deferred are included in Salary compensation.
8
<PAGE>
STOCK OPTION GRANTS IN FISCAL YEAR 1998
The table below shows the Company's stock option grants in fiscal year 1998 to
the named Executive Officers. The 1996 Stock Awards Plan, pursuant to which
these grants were made, authorizes the Compensation and Management Development
Committee to grant stock options, stock appreciation rights, shares of
restricted stock and other awards valued by reference to the Company's common
stock.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
---------------------------------------------------- ----------------------------------
INDIVIDUAL GRANTS/(1)/ POTENTIAL REALIZABLE VALUE AT
ASSUMED ANNUAL RATES
OF STOCK PRICE
APPRECIATION FOR OPTION TERM/(2)/
- - --------------- ---------------------------------------------------- ----------------------------------
NAME NUMBER OF PERCENT OF TOTAL EXERCISE OR EXPIRATION 5% 10%
SECURITIES OPTIONS/SARS BASE PRICE DATE
UNDERLYING GRANTED TO PER
OPTIONS/SARS EMPLOYEES IN SHARE
GRANTED (#) FISCAL YEAR
- - -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
JAMES R. WILSON 40,000 26.5 $40.625 8/21/07 $ 1,023,752 $ 2,583,752
- - -----------------------------------------------------------------------------------------------------------
ROBERT L. CRIPPEN 8,000 5.3 40.625 8/21/07 204,750 516,750
- - -----------------------------------------------------------------------------------------------------------
RICHARD L. CORBIN 8,000 5.3 40.625 8/21/07 204,750 516,750
- - -----------------------------------------------------------------------------------------------------------
JAMES E. MCNUTTY 8,000 5.3 40.625 8/21/07 204,750 516,750
- - -----------------------------------------------------------------------------------------------------------
JOSEPH A. LOMBARDO 5,150 3.4 40.625 8/21/07 131,808 332,658
- - -----------------------------------------------------------------------------------------------------------
</TABLE>
/(1)/All stock option grants are issued at market value on the date of grant.
Options issued August 21, 1997 and subsequent thereto are exercisable in an
increment of one third each year of a three year vesting period. Options
issued prior to August 1997 are exercisable one year after the date of
grant. All options have a ten year term. Options lapse three months after
the date of termination of employment except for retirement, death or
disability. For Executive Officers named in the table and other key
employees, the stock option grants prior to October 1993 contain limited
stock appreciation rights exercisable immediately only upon the change of
control of the Company as defined on page 13 under the section Termination
of Employment and Change of Control Agreements. Options issued to Executive
Officers and certain key employees prior to June 1992 contain supplemental
cash payments (tax gross-up payments) provisions. No stock option grants
awarded subsequent to June 1992 by the Compensation Committee contain
supplemental cash payments.
/(2)/No gain will be realized by an optionee without an increase in the price of
the Company's common stock which will correspondingly increase the value of
the common stock outstanding held by all stockholders. A 5 percent and a 10
percent gain over the ten year option period would increase the total value
of the Company's outstanding common stock by $834.8 and $2,359.2 million
respectively. There can be no assurance that the gains shown in the table
will be realized since any gain is dependent on the performance of the
Company's common stock price which is attributable to many factors
including but not limited to Company performance and stock market
conditions. The value of the realized gains shown in this Table is provided
solely for illustrative purposes only in compliance with rules promulgated
by the Securities and Exchange Commission.
9
<PAGE>
STOCK OPTIONS EXERCISED DURING FISCAL YEAR 1998
The following table presents information regarding the exercise during fiscal
year 1998 of options held by the named Executive Officers on June 30, 1998, to
purchase shares of the Company's common stock and the value of unexercised
stock options.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR
VALUES
<TABLE>
- - --------------------------------------------------------------------------------------------
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS/SARS OPTIONS/SARS
AT FY-END AT FY-END/(1)/
(#) ($)
- - --------------------------------------------------------------------------------------------
NAME SHARES ACQUIRED VALUE/(2)/ EXERCISABLE/ EXERCISABLE/
ON EXERCISE (#) REALIZED ($) UNEXERCISABLE UNEXERCISABLE
- - --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
JAMES R. WILSON 0 $ 0 324,633/26,667 $9,866,774/$161,669
- - --------------------------------------------------------------------------------------------
ROBERT L. CRIPPEN 0 0 21,666/5,333 453,761/32,331
- - --------------------------------------------------------------------------------------------
RICHARD L. CORBIN 0 0 66,866/5,333 2,014,768/32,331
- - --------------------------------------------------------------------------------------------
JAMES E. MCNULTY 5,000 190,234 87,666/5,333 2,806,886/32,331
- - --------------------------------------------------------------------------------------------
JOSEPH A. LOMBARDO 0 0 128,116/3,433 4,398,750/20,813
- - --------------------------------------------------------------------------------------------
</TABLE>
/(1)/Value is calculated based on the closing New York Stock Exchange price of
the Company's common stock as of June 30, 1998, minus the option exercise
price.
/(2)/Value is calculated based on the average of the high and low New York Stock
Exchange price on the day on which the option was exercised minus the
option exercise price.
10
<PAGE>
LONG-TERM COMPENSATION
The following Table sets forth information concerning the named Executive
Officers participating in the Company's Key Executive Long-Term Incentive Plan
for fiscal year 1998 for the three-year Plan period beginning July 1, 1997, and
ending June 30, 2000.
LONG-TERM INCENTIVE PLAN AWARDS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
- - --------------------------------------------------- ----------------------------
NAME PERFORMANCES OR
OTHER PERIOD ESTIMATED FUTURE PAYOUTS
UNTIL MATURATION UNDER NON-STOCK PRICE-
OR PAYOUT BASED PLANS /(1)/
-------------------------
$ $ $
THRESHOLD TARGET MAXIMUM
- - -----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
JAMES R. WILSON 3 YEARS 71,875 287,500 575,000
- - -----------------------------------------------------------------------------
ROBERT L. CRIPPEN 3 YEARS 30,812 123,250 246,500
- - -----------------------------------------------------------------------------
RICHARD L. CORBIN 3 YEARS 27,093 108,375 216,750
- - -----------------------------------------------------------------------------
JAMES E. MCNULTY 3 YEARS 26,562 106,250 212,500
- - -----------------------------------------------------------------------------
JOSEPH A. LOMBARDO 3 YEARS 52,806 211,225 422,450
- - -----------------------------------------------------------------------------
</TABLE>
/(1)/Awards under the Company's Executive Long-Term Incentive Plan are based on
attainment of predetermined earnings per share goals and return on capital
for Executive Officers who are not also operating unit heads. For Executive
Officers and other key employees who are also operating unit managers
participating in the Plan, awards are based on attainment of predetermined
goals, including pretax profit and return on total investment goals. The
Plan bonus opportunities for Messrs. Crippen and Lombardo have been set on
the attainment of certain financial and performance targets to be achieved
with respect to the management of the RSRM Shuttle Contract. The Plan
provides that bonus payments be paid in a combination of cash and stock.
The stock is valued at market value on June 30. Estimated future payouts
are for the fiscal year 1998 Plan Period. The Plan was amended in 1997 to
provide that the target bonus award at the beginning of each three-year
Plan period be stated 50 percent in cash and 50 percent in Company Common
Stock. The Common Stock is contingently granted subject to forfeiture if
the Plan's target bonus goals are not achieved during the three-year Plan
period. The number of shares in the contingent grant is determined by
dividing the 50 percent of the Target Bonus opportunity by the average New
York Stock Exchange stock price on the first trading day of the three-year
Plan period. The contingent shares granted July 1, 1998 to Messrs. Wilson,
Crippen, Corbin and McNulty were 7,790, 2,947, 2,880, and 2,760
respectively. As a special plan participant, Mr. Lombardo receives
threshold, target and maximum bonus opportunities awards in cash.
The Plan provides a target bonus opportunity based on a percentage of each
participant's base annual compensation determined by the participant's salary
grade. The opportunity ranges from 65 percent of base annual compensation for
the lowest salary grade covered by the Plan to 100 percent of base annual
compensation for the highest salary grade covered by the Plan. The amount of
the bonus award paid will vary from 25 percent of the target bonus opportunity
being paid if the threshold bonus opportunity goals are achieved; 100 percent
of the target bonus opportunity if the target bonus goals are achieved; and a
maximum bonus of 200 percent of the target bonus opportunity if the maximum
bonus targets are achieved. The bonus opportunities are paid 50 percent in cash
and 50 percent in Company Common Stock.
11
<PAGE>
RETIREMENT PLAN
The Company maintains a defined benefit Pension Plan for non-bargaining unit
employees and funds its entire cost. The following table shows the estimated
annual benefits payable upon retirement (including amounts attributable to the
defined benefit excess plan) for the specified compensation and years of
service.
PENSION PLAN TABLE
<TABLE>
<CAPTION>
----------------------------------------------------
YEARS OF SERVICE
- - -----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
REMUNERATION 15 20 25 30 35 40
- - -----------------------------------------------------------------
$ 200,000 56,148 77,281 98,414 119,546 140,679 155,479
- - -----------------------------------------------------------------
400,000 115,798 159,231 202,664 246,096 289,529 319,129
- - -----------------------------------------------------------------
600,000 175,448 241,181 306,914 372,646 438,379 482,779
- - -----------------------------------------------------------------
800,000 235,098 323,131 411,164 499,196 587,229 646,429
- - -----------------------------------------------------------------
1,000,000 294,748 405,081 515,414 625,746 736,079 810,079
- - -----------------------------------------------------------------
1,500,000 443,873 609,956 776,039 942,121 1,108,204 1,219,204
- - -----------------------------------------------------------------
</TABLE>
As of June 30, 1998, the named Executive Officers had the following credit
service for determining pension benefits: James R. Wilson, 9 years; Robert L.
Crippen, 1.5 years; Richard L. Corbin, 4 years; James E. McNulty, 9 years and
Joseph A. Lombardo, 9 years.
All of the Executive Officers named in the Summary Compensation Table
participate in the Plan. Pension benefits are based on the average earnings for
the highest five consecutive years of the final ten years of service.
Compensation included in the final average earnings for pension benefit
computation includes base annual salary and annual bonuses but excludes
payments from the Company's Executive Long-Term Incentive Plan and all other
annual compensation shown in the Summary Compensation Table. Unreduced pension
benefits are calculated pursuant to the Plan's benefit formula as a straight
life annuity payable at age 67. Executive Officers of the Company retire at age
65. Benefits may be payable in the form of a joint and survivor or a ten-year
certain option. Also Messrs. Wilson, Corbin, Crippen, Lombardo, and McNulty
participate in an unfunded survivors income benefit plan which provides
benefits to a surviving spouse of approximately 50 percent of a participant's
base pay at death and continues until the participant would have attained age
65.
Because the Pension Plan is subject to the benefit and compensation limits
under the Internal Revenue Code of 1986 (the "Code"), the Company has
established an unfunded Excess Benefit Plan that provides for payment of
amounts that would have been paid to employees under the pension formula absent
the benefit limitations of the Code.
The Company also maintains a Supplemental Executive Retirement Plan ("SERP")
designed to provide unfunded supplemental retirement benefits to certain
Executive Officers and key employees of the Company. The SERP is designed to
provide such selected employees a benefit at retirement equal to 60 percent of
the participant's average five highest consecutive years of compensation during
the last ten years. Plan benefits are offset by amounts the participant
receives from the Company's Retirement Plan, Excess Benefit Plan, and any
pension benefits received from other employer plans including military
pensions. A reduced early retirement benefit is available only at the
discretion of the Chairman of the Board or President. The SERP provides
accelerated benefit accrual, vesting and payment in the event of a change of
control of the Company as defined by the Board of Directors. Messrs. Wilson,
Lombardo, Corbin, Crippen and McNulty participate in the SERP.
The Company may fund and secure all or a part of the Excess Benefit Plan and
SERP benefits through the use of a "Rabbi" Trust meeting the Code requirements.
All such funding is subject to the claims of the Company's creditors.
12
<PAGE>
TERMINATION OF EMPLOYMENT AND CHANGE OF CONTROL AGREEMENTS
The Company has entered into change of control employment agreements with
Messrs. Wilson, Crippen, Corbin, McNulty, Lombardo and with certain other key
employees. These agreements are intended to provide for continuity of
employment in the event of a change of control as defined by the agreements,
including the following events: (i) acquisition by any person of 20 percent or
more of the voting securities of the Company; (ii) changes of the "incumbent
Board" as defined in the agreements; (iii) reorganization, merger or
consolidation of the Company; or (iv) liquidation or sale of the Company. Each
of the agreements requires continued employment of the executive following a
change of control on a basis equivalent to his employment immediately before
such change. In the event that during the three-year period following a change
of control, the executive terminates his employment for "good reason" (as
defined in the agreements) or for any reason during the 30-day period
commencing one year after the change of control or the Company terminates the
executive's employment "without cause" (as defined in the agreements), the
executive would be entitled to receive a lump sum payment equal to three times
the sum of the executive's salary, average long-term bonus and highest annual
bonus plus service and earnings credits under any Company retirement plan which
would have been earned during the employment period and the continuance of
fringe benefits during the three years after such termination. The agreements
provide that payments from the Company which (a) constitute "parachute
payments" as defined in Section 280G of the Code and (b) would subject the
executive to the 20 percent excise tax (the "Excise Tax") contained in Section
4999 of the Code, will be "grossed up" by an additional payment in an amount
defined by the agreements which takes into account the Excise Tax, tax
penalties and interest, as the case may be, with respect to any such "parachute
payments." The amounts of such parachute payments, pursuant to the terms
described above, are only determinable with specificity on the date such
payment obligations, if any, are triggered. With respect to the salary, annual
bonuses and long-term bonuses shown in the Summary Compensation Table, the
estimated benefits payable under the foregoing agreements including the SERP
for Messrs. Wilson, Corbin, Crippen, Lombardo, and McNulty are $9.4; $3.7;
$4.2; $4.7; and $3.6 million respectively.
BOARD COMPENSATION AND MANAGEMENT DEVELOPMENT COMMITTEE REPORT ON EXECUTIVE
COMPENSATION
Compensation Policy
The Committee's Compensation Policy is designed to provide a competitive
compensation program to attract, retain, motivate and reward talented
individuals as Executive Officers and as key employees of the Company. The key
executive compensation programs are administered by the Committee. The
Committee's policies are implemented by the Company's compensation and benefits
staff under the direction of the Executive Vice President of Human Resources
and Administration. The components of the program include base annual salary,
short and long-term cash and stock based incentives, benefits and perquisites.
Compensation grades, ranges and midpoints adopted by the Committee are set
based upon nationally recognized compensation surveys: (i) the Hewitt
Management Compensation Survey 777 consisting of 316 companies; and (ii) Towers
Perrin Compensation Data Bank consisting of 639 companies. The Committee also
considers the compensation of peer group companies. Base salaries are set to
correspond approximately with the mean of salaries offered for like positions
by comparable companies. Short and long-term incentives are designed to provide
above average total compensation when performance of the Company or an
operating unit exceeds targets set by the Committee. Annual incentives are
related to the Company and operating unit performance and individual
achievement of qualitative individual and strategic goals. Long-term incentives
are designed to balance management focus between short and long-term goals and
to provide capital accumulation linked to Company or operating unit
performance. Stock-based incentives are designed to align the results achieved
for shareholders in share price performance. The total compensation program is
designed to reflect the overall level of the Company's or operating unit's
financial performance, achievement of strategic goals, and the Company's stock
performance. Total compensation will vary from year to year depending on the
actual performance achieved against the predetermined goals set both
financially and qualitatively and the Company's share price reflected in stock
based compensation awards.
13
<PAGE>
During fiscal year 1998, the Committee reviewed the Company's compensation
structure. The Committee considered the size of the Company, reflecting the
acquisition of the controlling interest and consolidation of Howmet and the
acquisition of Jacobson Mfg. Co. Inc., an industrial fastener company. The
Committee also reviewed management performance and the competitive market
conditions for recruiting and retaining experienced senior executives. As the
result of this review, the Committee deemed that base salary adjustments were
warranted for the Chief Executive Officer and certain other senior executives.
The principal elements of the compensation program administered by the
Committee under the Compensation Policy for the Chief Executive Officer; the
Executive Officers; and other key employees are as follows:
Base Annual Salary
Base annual salaries are set against one of seven established salary grades
reflecting the position, duties and level of responsibilities of each Executive
Officer, including the Chief Executive Officer, and each other key employee.
Annual Bonus Program
The Key Executive Bonus Plan provides annual cash incentive opportunities to
Executive Officers and other key employees selected by the Committee. Each
bonus amount is based upon the Company or respective operating unit achieving
predetermined earnings goals and the attainment of individual qualitative
strategic goals relative to the participant's position, duties and
responsibilities with the Company ("Target Bonus Goals"). The Board of
Directors sets the Company's earnings goals effective the beginning of the
fiscal year. Subject to Committee review and approval, the Chief Executive
Officer sets the earnings and strategic goals for operating unit participants.
The Plan permits Committee discretion in adjusting incentives for Plan
participants (as well as penalties for non-achievement) of certain
predetermined qualitative strategic, operating, and financial goals not
necessarily tied to earnings of the Company ("Strategic Goals").
The Plan also permits the Committee to designate employees, including Executive
Officers, as special participants to receive discretionary bonus payments made
by the Committee in recognition of outstanding achievements or accomplishments.
Annual bonuses accrued for fiscal year 1998 reflect the level of earnings
achieved for corporate or operation unit Plan participants, and achievement of
strategic goals. All Executive Officers, including the Chief Executive Officer,
named in the Summary Compensation Table earned bonuses from the Plan.
Long-Term Incentive Plan
The Key Executive Long-Term Incentive Plan is designed as a long-term incentive
program for Executive Officers and other key employees in a position to
substantially influence the performance of the Company. The Plan authorizes
payment of incentive bonuses based on achievement of financial goals for the
Company and its operating units predetermined by the Committee at the beginning
of each three-year Plan period. The Plan provides that 50 percent of the Target
Bonus opportunity, ranging from 65% to 100% of base annual compensation, be
awarded in cash and 50 percent in shares of the Company common stock. The
number of shares of Company common stock awarded is determined at the beginning
of each three-year Plan period. For Executive Officers, including the Chief
Executive Officer, who are not operating unit managers, the financial goals are
based on earnings per share growth and return on total capital of the Company.
For each operating unit manager of the Company, the financial goals are growth
in operating profits and return on total investment at that unit. Messrs.
Wilson, Corbin, Lombardo and McNulty have earned bonuses from the Plan. Robert
L. Crippen will be eligible for a bonus payment, if earned, for the plan period
ending June 30, 1999.
14
<PAGE>
Stock Options
The Committee has determined that providing stock based compensation awards to
Executive Officers and other key employees who are in a position to impact the
future performance of the Company is an integral part of the compensation
package. The Company's 1989 and 1996 Stock Awards Plans approved by
stockholders, authorize the Committee to grant stock options, stock
appreciation rights, shares of restricted stock and other stock awards. The
number of shares granted to an individual is based on Committee established
guidelines relating to the recipient's position, salary grade and stock price.
Stock options are granted for a period of ten years and vest over a three-year
period.
Stock Ownership Guidelines
With the objective of tying a larger portion of executive compensation to the
performance of the Company's stock, the Committee has adopted stock ownership
guidelines for the Chief Executive Officer and senior executives who are his
direct reports.
Perquisites
The Committee reviews annually the Executive Officers', including the Chief
Executive Officer's, perquisites to determine if they are competitive and
reflect the usual and customary industry practices based on compensation survey
data.
Determination of the Chief Executive Officer's Compensation
The fiscal year 1998 compensation for Mr. James R. Wilson, Chairman of the
Board, President and Chief Executive Officer, consists of a base annual salary,
an annual bonus, long-term incentive bonus, stock option grant, employee
benefits provided to salaried employees as a group, and perquisites that are
usual and customary for the position.
The Committee has determined Mr. Wilson's salary grade, salary range, and
midpoint based on his position as Chairman of the Board, President and Chief
Executive Officer using the salary data described above. Considering the
financial performance of the Company, size of the Company resulting from
acquiring the controlling interest in Howmet, recent acquisitions increasing
the size of Huck International, the size of the Company compared to other
aerospace and industrial manufacturing companies and the industries and markets
the Company serves, the Committee increased Mr. Wilson's base compensation,
effective July 1, 1998 from $575,000 to $700,000.
Pursuant to the terms of the Key Executive Bonus Plan for fiscal year 1998, Mr.
Wilson received an annual bonus award of $792,750 or 200 percent of his Target
Bonus Opportunity (the maximum bonus award under the Plan). The payment
reflects the achievement of the maximum earnings per share goal and
subjectively measured qualitative goals under the Plan as reviewed and approved
by the Committee.
Mr. Wilson's fiscal year 1998 Key Executive Long-Term Incentive Plan bonus plan
payment of $425,000 represents the achievement of return on capital financial
goals exceeding the target goals established at the beginning of the three year
plan period beginning July 1, 1995. This bonus payment is paid 50 percent in
cash and 50 percent in Company common stock based on the market price on June
30, 1998.
Mr. Wilson's compensation and the compensation of the other named Executive
Officers in the Summary Compensation Table reflect the financial performance of
the Company and its operating units. The Committee considered the
accomplishments achieved as the result of strategic actions taken to reposition
the Company in commercial markets reducing the Company's dependence on
federally funded defense and aerospace programs; acquisition of the controlling
interest of Howmet and the acquisition of Jacobson. During the fiscal year, the
Company's sales increased 100 percent, from $890 to $1,779.3 million and income
excluding extraordinary items increased 53 percent from $82.4 to $126.0
million.
15
<PAGE>
1993 Tax Act Compensation Limits
Section 162(m) of the Code adopted under the 1993 tax law changes, restricts
the tax deductibility for certain non-formula performance based executive
compensation exceeding $1 million. Mr. Wilson's compensation exceeds the $1
million compensation limit for fiscal year 1998. To the extent that such
compensation in excess of the $1 million dollar limit does not meet the
performance based compensation requirements, the Company may not receive the
benefit of a corresponding tax deduction. The Committee has determined that
retaining the flexibility of discretion in determining all or part of the
criteria for the Executive Officer incentive compensation awards outweighs the
tax benefit of the corresponding tax deduction that might otherwise have been
received for such compensation meeting Code requirements.
COMPENSATION AND MANAGEMENT DEVELOPMENT COMMITTEE
Charles S. Locke, Chairman
Edsel D. Dunford
D. Larry Moore
Donald C. Trauscht
The report of the Compensation Committee and the following stock performance
graph are not deemed to be "soliciting material" or to be "filed" with the
Securities and Exchange Commission or subject to Regulation 14A or 14C or to
the liabilities of Section 18 of the Securities Exchange Act of 1934, as
amended ("Exchange Act") except to the extent the Company specifically requests
that such information be treated as soliciting material or specifically
incorporates it by reference into any filing under the Securities Act of 1933,
as amended, or the Exchange Act.
16
<PAGE>
PERFORMANCE GRAPH
The following graph presents a comparison of the cumulative stockholder return
on the common stock of the Company for the five year period beginning July 1,
1993, and ending June 30, 1998, as measured against (i) the Standard & Poor's
500 Stock Index and (ii) the Standard & Poor's Aerospace and Defense Index.
The returns shown assume that $100 was invested in the Company's common stock
and the two indices starting on July 1, 1993. The returns shown also assume
that all dividends paid during the five year period were reinvested.
Stockholders are cautioned against drawing any conclusions from the data
contained therein, as past performance is no guarantee of future results.
[PERFORMANCE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
6/93 6/94 6/95 6/96 6/97 6/98
------- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
CORDANT TECHNOLOGIES INC. ......... $100.00 113.28 145.62 193.53 347.48 461.97
STANDARD & POOR'S 500 INDEX........ $100.00 101.34 127.75 161.03 216.70 282.15
STANDARD & POOR'S AEROSPACE/DEFENSE
INDEX............................. $100.00 119.56 165.75 227.63 289.54 272.59
</TABLE>
17
<PAGE>
2. PROPOSAL TO APPROVE AMENDMENTS TO THE CORDANT TECHNOLOGIES INC. AMENDED AND
RESTATED 1996 STOCK AWARDS PLAN
The 1996 Stock Awards Plan ("Plan") was adopted by the Board of Directors on
June 20, 1996 and approved by stockholders at the 1996 Annual Meeting.
The amendments to the Plan being presented to stockholders would permit
directors of the Company to participate in the Plan. The Plan, as originally
adopted and approved by stockholders, only permits officers and employees
selected by a Committee of the Board consisting of two or more outside
directors to participate in the Plan. This Plan, as amended and restated
("Amended Plan"), is set forth in Exhibit A for reference. The Amended Plan is
being presented to stockholders for approval as required by the rules of the
New York Stock Exchange which requires stockholders approval of a plan or
arrangement pursuant to which stock may be acquired by directors.
To align a portion of a non-employee director's compensation with the
performance of the Company's common stock and to provide director compensation
at levels to meet competitive conditions for the retention and recruitment of
qualified individuals to serve as directors of the Company, the Board of
Directors approved a Director Restricted Stock Program. The Program is
administered by a committee of two or more outside directors which sets the
terms and conditions of the grant and the number of shares in the grant
awarded. Under the Program grants of restricted stock to directors would be
made under the terms of the Amended Plan being presented to stockholders for
approval and grant agreement approved by the Committee.
Under the terms of the restricted stock grants approved by the Committee and
made from the Amended Plan, each director, who is not an employee, receives a
restricted stock grant valued at $20,000. The number of shares in the grant
award was determined by dividing $20,000 by the average of the high and low New
York Stock Exchange price for the Company's common stock on the date of grant
rounded up to the nearest whole share.
The stock is contingently granted and is restricted as to transferability,
assignment and encumbrance until the conditions of forfeiture lapse. The shares
of stock in the grant vest and are free of restrictions on the date the
director retires from the board or in the event of death or disability or a
change in control of the Company as defined by the terms of the grant. In the
event the director resigns from the board, or fails to stand for reelection
prior to the director's retirement date, the stock granted to the director is
forfeited unless 80 percent of all of the directors, then on the Board, with
the affected director abstaining, waive such forfeiture by formal action.
On the date the restrictions and the event of forfeiture end, the shares of the
Company's common stock granted to the director become freely transferable.
During the time the restrictions apply, the director has the right of a
stockholder to vote the shares and receive dividends and other stock
distributions and adjustments applicable to stockholders.
Effective July 1, 1998, 428 shares of restricted stock were granted to Messrs.
Armstrong, Carns, Dunford, Garrison, Locke, Moore, Studeman and Trauscht at
$46.75 per share. Effective August 20, 1998, 510 shares of restricted stock
were granted to Messrs. Lesar and Lamb at $39.25 per share. All such restricted
stock grants have been made contingent on favorable approval of stockholders of
the amendments to the Amended Plan. On September 8, 1998, the closing price for
the Company's Common Stock on the New York Stock Exchange was $37.4375 per
share.
18
<PAGE>
NEW PLAN BENEFITS
<TABLE>
<CAPTION>
- - --------------------------------------------------------
NAME AND POSITION DOLLAR NUMBER
VALUE(1) OF SHARES
- - --------------------------------------------------------
<S> <C> <C>
JAMES R. WILSON 0 0
ROBERT L. CRIPPEN 0 0
RICHARD L. CORBIN 0 0
JAMES E. MCNULTY 0 0
JOSEPH A. LOMBARDO 0 0
EXECUTIVE GROUP 0 0
NON-EXECUTIVE DIRECTOR GROUP $166,372 4,444
NON-EXECUTIVE OFFICER EMPLOYEE GROUP 0 0
- - --------------------------------------------------------
</TABLE>
/(1)/Calculation by multiplying the fair market value of $37.4375 per share as
of September 8, 1998 by the number of shares in the restricted stock
grants.
DESCRIPTION OF PLAN
The following is a summary description of the Amended Plan, which is set forth
hereto as Exhibit A and incorporated herein by reference. The description is
qualified in its entirety by, and made subject to, the more complete
information set forth in the Amended Plan attached hereto. The Amended Plan
provides for the authorization of two million shares of the Company's common
stock as adjusted for a two-for-one stock split in March 1998 that may be
issued and as to which stock options. Stock Appreciation Rights, and restricted
stock ("Awards") may be granted.
The Amended Plan is administered by the Committee consisting of two or more
directors of the Company who are "outside directors" as the term is used in
Code Section 162(m) and "Non-Employee" directors for the purpose of Rule 16b-3.
The terms of the Amended Plan permit the Committee to make stock option grants
which may be Incentive Stock Options within the meaning of Code Section 422 or
other forms of nonqualified stock options as the Committee may determine. The
exercise price of all options granted must be at not less than 100 percent of
the fair market value of the Company's common stock on the date of grant. The
term of the option is set by the Committee, and in the case of Incentive Stock
Options, the term shall not be more than 10 years. Options may be exercised in
whole or in part during the term of the grant in cash, common stock of the
Company with fair market value on the date of grant equal to the aggregate
exercise price ("stock swaps"), a combination of cash or common stock or with
other good and valuable consideration determined by the Committee pursuant to
the terms of the Plan.
The Amended Plan permits the Committee to grant Stock Appreciation Rights
(SAR's) on terms and conditions not inconsistent with the terms of the Plan at
not less than 100 percent of the fair market value of the common stock on the
date of grant. SAR's may be issued in tandem with an option. The amount payable
by the Company must be paid in Company common stock valued at the fair market
value on the date of exercise, cash, or a combination of both.
The Amended Plan permits the Committee to issue restricted stock on such terms
and conditions as the Committee may determine not inconsistent with the terms
of the Amended Plan including shares of common stock earned under any of the
Company's compensation plans.
The maximum number of shares of common stock with respect to which awards may
be granted under the Amended Plan during any calendar year to a single plan
participant shall not exceed 400,000 shares.
All awards made by the Committee shall be made by written agreement which shall
contain such terms and conditions that are consistent with Code Section 162(m)
and Code Section 422 in respect to the award of Incentive Stock Options. Such
written agreement shall set forth the terms among others to the award of
Incentive Stock Options. Such written agreement shall set forth the terms among
others under which such awards shall vest, are exercisable, including
termination of employment, death, disability, retirement and change of control
of the Company, and the method and manner of payment.
19
<PAGE>
No award made under the Amended Plan is transferable by a participant except
pursuant to the terms of a designation of beneficiary and the laws of dissent
and distribution or pursuant to a qualified domestic relations order as defined
by the Employee Retirement Income Security Act of 1974.
Awards are subject to adjustment to reflect any changes in the outstanding
common stock of the Company or other changes affecting shares, including
adjustments in the number of shares available for issuance, shares covered by
an outstanding award, or adjustment in price that become necessary to prevent a
dilution or enlargement of benefits or potential benefits under the Amended
Plan.
The Committee has the power to withhold taxes or require participants to remit
to the Company such amounts as required to satisfy tax withholding obligations
either in cash or common stock or a combination of both.
Any key employee of the Company or any entity in which the Company has a direct
or indirect equity interest which is designated as an Affiliate by the
Committee and, subject to stockholder approval of the amendments described
above, any director of the Company who is not also an employee or officer of
the Company, is eligible to participate in the Amended Plan. There are
approximately sixty employees and, subject to stockholder approval of the
amendments described above, ten directors who are eligible to participate in
the Plan. The Amended Plan shall be administered by the Committee, which in its
sole discretion, has the authority to select participants; and to make such
awards in such form and amount it desires; and impose limitation, restrictions,
and conditions on the award granted and the exercise not otherwise inconsistent
with the terms of the Plan. The Committee shall have such other administrative
powers conferred to the Committee by the Plan including Plan interpretation and
rules and procedures of Plan administration.
The Plan will terminate August 14, 2006. The Board of Directors or Committee
may amend or terminate the Plan provided, however, that such amendment shall
only be made without stockholder approval as permitted by law and the stock
exchanges where the Company's common stock is listed.
FEDERAL INCOME TAX CONSEQUENCES OF THE AMENDED PLAN
The following discussion is limited to federal income tax laws and does not
discuss income tax laws of any state. There is no assurance that such federal
income tax laws will not change.
The 1996 Plan is not a qualified plan under Code Section 401(a) and is not
subject to the provisions of the Employee Retirement Income Security Act.
STOCK OPTIONS. The grant of an Incentive Stock Option or a nonqualified stock
option would not result in income for the participant or in a deduction for the
company.
The exercise of a nonqualified stock option would result in ordinary income for
the participant and a deduction for the Company measured by the difference
between the option price and the fair market value of the shares received at
the time of exercise. Income tax withholding would be required.
The exercise of an Incentive Stock Option would not result in income for the
participant if the participant does not dispose of the shares within two years
after the date of grant or one year after the transfer of shares upon exercise.
If these requirements are met, the basis of the shares upon later disposition
would be the option price. Any gain will be taxed to the employee as long-term
capital gain, and the Company would not be entitled to a deduction. The excess
of the market value on the exercise date over the option price is an item of
tax preference, potentially subject to the alternative minimum tax.
If the participant disposes of the shares prior to the expiration of either of
the holding periods (such as in the case of a "cashless" stock option exercise
or other disposition), the participant would recognize ordinary income, and the
Company would be entitled to a deduction equal to the lesser of the fair market
value of the shares on the exercise date minus the option price or the amount
realized on disposition minus the option price. Any gain in excess of the
ordinary income portion would be taxable as long-term or short-term capital
gain or additional ordinary income as determined by the holding period.
20
<PAGE>
STOCK APPRECIATION RIGHTS. The grant of a SAR would not result in income for
the participant or in a deduction for the Company. Upon the exercise of a SAR,
the participant would recognize ordinary income, and the Company would be
entitled to a deduction measured by the fair market value of the shares plus
any cash received. Income tax withholding would be required.
RESTRICTED STOCK GRANTS. The grant of Restricted Stock, including pursuant to
the Director Restricted Stock Program, should not result in income for the
participant or in a deduction for the Company for federal income tax purposes,
assuming the shares transferred are subject to restrictions resulting in a
"substantial risk of forfeiture" as intended by the Company. If there are no
such restrictions (such as the issuance of shares in connection with awards
from other Company compensation plans), the participant would recognize
ordinary income upon receipt of the shares. Dividends paid to the participant
while the stock remained subject to restriction would be treated as
compensation for federal income tax purposes. At the time the restrictions
lapse, the participant would receive ordinary income, and the Company would be
entitled to a deduction measured by the fair market value of the shares at the
time of lapse. Income tax withholding would be required.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THIS PROPOSAL TO APPROVE THE
CORDANT TECHNOLOGIES INC. AMENDED AND RESTATED 1996 STOCK AWARDS PLAN.
21
<PAGE>
3. RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS
Upon recommendation by the Audit Committee, the Board of Directors has
appointed Ernst & Young LLP ("Ernst &Young") as its independent auditors for
the fiscal year ending December 31, 1998, reflecting the change in the
Company's fiscal year-end to December 31. At the Board's direction, the
appointment of Ernst & Young is being presented to the stockholders for
ratification at the 1998 Annual Meeting. While ratification is not required by
law or the Company's Certificate of Incorporation or By-Laws, the Board
believes that such ratification is desirable. In the event this appointment is
not ratified by stockholders, the Board will consider that fact when it
appoints independent auditors for the next fiscal year.
Ernst & Young was the Company's independent auditors for fiscal year 1998 and
for all prior years since 1969. Audit services provided to the Company by Ernst
& Young during fiscal year 1998 consisted of examination of the financial
statements of the Company and its subsidiaries for that year and the
preparation of various related reports, as well as services relating to filings
with the Securities and Exchange Commission, and pension, savings and welfare
plan audits. Ernst & Young are also the auditors for Howmet International, 62
percent owned by the Company.
Representatives of Ernst & Young are expected to be present at the 1998 meeting
with the opportunity to make a statement if they so desire and to be available
to respond to appropriate questions relating to that firm's examination of the
Company's financial statements for fiscal year 1998.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE PROPOSAL TO RATIFY THE
APPOINTMENT OF ERNST & YOUNG.
DISCRETIONARY VOTING OF PROXIES ON OTHER MATTERS
Management does not now intend to bring before the 1998 Annual Meeting any
matters other than those disclosed in the notice of the meeting. Should any
matter requiring a vote of stockholders be properly brought before the meeting
by or at the direction of the Board of Directors, the proxies in the enclosed
form confer upon the person or persons entitled to vote the shares represented
by such proxies discretionary authority to vote such shares in respect of any
such matter in accordance with their best judgment.
For business to be properly brought before an annual stockholders' meeting by a
stockholder, advance written notice in accordance with the By-Laws of the
Company must be received by the Corporate Secretary of the Company at its
principal executive offices.
STOCKHOLDER PROPOSALS FOR 1999 ANNUAL MEETING
Stockholder proposals intended for the proxy statement for the 1999 Annual
Stockholders' Meeting must be received by the Corporate Secretary of the
Company at its principal executive offices no later than January 14, 1999.
ANNUAL REPORT AND FORM 10-K
The Company will provide, without charge, upon written request from any person
solicited herein, a copy of the Cordant Technologies Inc. Annual Report and
Form 10-K filed with the Securities and Exchange Commission. Requests should be
directed to the Manager of Investor Relations, Cordant Technologies Inc., 15 W.
South Temple, Suite 1600, Salt Lake City, Utah 84101.
By Order of the Board of Directors,
Edwin M. North
Vice President and Corporate Secretary
Salt Lake City, Utah
September 11, 1998
22
<PAGE>
EXHIBIT A
CORDANT TECHNOLOGIES INC.
AMENDED AND RESTATED
1996 STOCK AWARDS PLAN
1. PURPOSE. The purpose of the Cordant Technologies Inc. Amended and Restated
1996 Stock Awards Plan (the "Plan") is to promote the long term financial
interests and growth of Cordant Technologies Inc. (the "Company") by (a)
attracting and retaining qualified individuals as Directors and executive
personnel, (b) motivating executive personnel by means of growth-related
incentives, (c) providing incentive compensation opportunities that are
competitive with those of other major corporations; and (d) furthering the
identity of interests of Participants with those of the stockholders of the
Company.
2. DEFINITIONS. The following definitions are applicable to the Plan:
"Affiliate" means any entity in which the Company has a direct or indirect
equity interest which is so designated by the Committee.
"Award Limit" means 400,000 shares of Common Stock.
"Code" means the Internal Revenue Code of 1986, as amended, and any
successor statue.
"Committee" means, as to a participant who is not a Director, a committee
of two or more Directors of the Company who are "outside Directors" as such
term is used in Section 162(m) of the Code and Non-Employee Directors for
purposes of Rule 16b-3. With respect to a Director who is a participant,
the Committee shall be the Board of Directors.
"Common Stock" means the common stock, $1.00 par value, of the Company or
such other securities as may be substituted therefore pursuant to paragraph
6(e).
"Director" means any person who is a member of the Board of Directors of
the Company and is not also an Employee or an Officer of the Company.
"Employee" means any officer or other employee (as defined in accordance
with Section 3401(c) of the Code) of the Company, or of any Affiliate.
The "Fair Market Value" of a share of Common Stock means the average
between the highest and lowest quoted selling prices of the common stock on
the New York Stock Exchange on pertinent option grant date or exercise
date.
"Participant" means any Director or key Employee of the Company or an
Affiliate selected by the Committee.
"QDRO" means a qualified domestic relations order as defined by the Code or
Title I of the Employee Retirement Income Security Act of 1974, as amended,
or the rules thereunder.
"Rule 16b-3" means such rule adopted under the Securities Exchange Act of
1934, as such rule is amended from time to time, or any successor rule.
3. LIMITATION ON AGGREGATE SHARES. The number of shares of common stock with
respect to which awards may be granted under the Plan shall not exceed
1,000,000 shares. Such 1,000,000 shares of common stock may be either
previously authorized but unissued shares, treasury shares, or a combination
thereof, as the Committee shall determine. The maximum number of shares of
common stock respect to which awards may be granted under the Plan during any
calendar year to a single Participant may not exceed the Award Limit. To the
extent required by Section 162(m) of the Code, shares subject to Options which
are canceled continue to be counted against the Award Limit and if,
A-1
<PAGE>
after grant of an Option, the price of shares subject to such Option is
reduced, the transaction is treated as a cancellation of the Option and a grant
of a new Option and both the Option deemed to be canceled and the Option deemed
to be granted are counted against the Award Limit. Furthermore, to the extent
required by Section 162(m) of the Code, if, after grant of a Stock Appreciation
Right ("SAR"), the base amount on which stock appreciation is calculated is
reduced to reflect a reduction in the Fair Market Value of the Company's Common
Stock, the transaction is treated as a cancellation of the SAR and a grant of a
new SAR and both the SAR deemed to be canceled and the SAR deemed to be granted
are counted against the Award Limit.
4. ADD-BACK OF OPTIONS AND OTHER RIGHTS. If any Option, other right to acquire
shares of Common Stock under this Plan, or any other award, expires or is
canceled without having been fully exercised, or is exercised in whole or in
part for cash as permitted by this Plan, the number of shares subject to such
Option or other right but as to which such Option or other right was not
exercised prior to its expiration, cancellation or exercise may again be
optioned, granted or awarded hereunder, subject to the limitations of Section
3. Furthermore, any shares subject to Options or other awards which are
adjusted pursuant to Section 6(e) and become exercisable with respect to shares
of stock of another corporation shall be considered canceled and may again be
optioned, granted or awarded hereunder, subject to the limitations of Section
3. Shares of Common Stock which are delivered by the Participant or withheld by
the Company upon the exercise of any Option or other award under this Plan, in
payment of the exercise price thereof, may again be optioned, granted or
awarded hereunder, subject to the limitations of Section 3. If any share of
Restricted Stock is forfeited by the Participant or repurchased by the Company
pursuant to Section 5(c)(iii) hereof, such share may again be optioned, granted
or awarded hereunder, subject to the limitations of Section 3. Notwithstanding
the provisions of this Section 4, no shares of Common Stock may again be
optioned, granted or awarded if such action would cause an Incentive Stock
Option to fail to qualify as an incentive stock option under Section 422 of the
Code.
5. AWARDS. The Committee may grant stock options ("Options"), to Participants,
in accordance with this paragraph 5 and the other provisions of the Plan.
(a) Options.
(i) Option Grants. Options granted under the Plan may be incentive stock
options ("ISOs") within the meaning of Section 422 of the Code or any successor
provision, or in such other form, consistent with the Plan, as the Committee
may determine.
(ii) Option Exercise Price. The exercise price of an Option shall be fixed by
the Committee at not less than 100% of the Fair Market Value of a share of
common stock on the date of grant.
(iii) Option Term. The term of an Option shall be set by the Committee in its
discretion; provided, however, that in the case of ISOs, the term shall not be
more than ten (10) years from the date the ISO is granted.
(iv) Exercisability. Options shall be exercisable at such time or times as the
Committee shall determine at or subsequent to grant.
(v) Exercise of Options. An exercisable Option may be exercised in whole or in
part. However, an Option shall not be exercisable with respect to fractional
shares and the Committee may require that, by the terms of the Option, a
partial exercise be with respect to a minimum number of shares. Options shall
be exercised in whole or in part by providing (A) written notice to the Company
(to the attention of the Corporate Secretary) complying with the applicable
rules established by the Committee; (B) such representations and documents as
the Committee deems necessary or advisable to effect compliance with all
applicable laws or regulations; (C) in the event that the Option shall be
exercised pursuant to Section 6(d) by any person or persons other than the
optionee, appropriate proof of the right of such person or persons to exercise
the Option; and (D) payment in full of the option price. Payment of the option
price may be made, at the discretion of the optionee, and to the extent
permitted by the Committee, (1) in cash (including check, bank draft, or money
order), (2) in Common
A-2
<PAGE>
Stock with a Fair Market Value on the date of delivery equal to the aggregate
exercise price of the Option or exercised portion thereof, (3) by a combination
of cash and common stock, or (4) with any other good and valuable
consideration.
(vi) Rights as Stockholders. The holders of Options shall not be, nor have any
of the rights or privileges of, stockholders of the Company in respect of any
shares purchasable upon the exercise of any part of an Option unless and until
certificates representing such shares have been issued by the Company to such
holders.
(vii) Ownership and Transfer Restrictions. The Committee may impose such
restrictions on the ownership and transferability of the shares purchasable
upon the exercise of an Option as it deems appropriate. Any such restriction
shall be set forth in the respective Stock Option Agreement and may be referred
to on the certificates evidencing such shares. The Committee may require the
Employee to give the Company prompt notice of any disposition of shares of
Common Stock acquired by exercise of an ISO within (i) two years from the date
of granting such Option to such Employee or (ii) one year after the transfer of
such shares to such Employee. The Committee may direct that the certificates
evidencing shares acquired by exercise of an Option refer to such requirement
to give prompt notice of disposition.
(b) Stock Appreciation Rights.
(i) Grant and Price of SAR. Subject to such terms and conditions not
inconsistent with this Plan as the Committee shall impose and shall be
evidenced by a written Stock Appreciation Right Agreement, an SAR shall entitle
its holder to receive from the Company, at the time of exercise of such right,
an amount equal to the excess of the Fair Market Value (at the date of
exercise) of a share of common stock over the SAR price multiplied by the
number of shares as to which the holder is exercising the SAR. The SAR price
shall be fixed by the Committee at not less than 100% of the Fair Market Value
of a share of common stock on the date of grant. SARs may be in tandem with any
previously or contemporaneously granted Option or independent of any Option.
(ii) Tandem SARs. An SAR in tandem with an Option shall be related to a
particular Option and shall be exercisable only when and to the extent the
related Option is exercisable. An SAR in tandem with an Option may be granted
to the Participant for no more than the number of shares subject to the
simultaneously or previously granted Option to which it is coupled.
(iii) Amount Payable by Company. The amount payable may be paid by the Company
in common stock (valued at its Fair Market Value on the date of exercise), cash
or a combination thereof, as the Committee may determine, which determination
shall be made after considering any preference expressed by the holder.
(iv) Exercise of SAR. An SAR shall be exercised by written notice to the
Company (to the attention of the Corporate Secretary) at any time prior to its
stated expiration, subject to any timing or other restrictions with respect to
a SAR, including a window period limitation, as may be imposed by the
Committee.
(c) Restricted Stock.
(i) Restricted Stock Award. The Committee may award to any Participant shares
of common stock, including shares earned under any of the Company's
compensation plans, subject to this paragraph 5(c) and such other terms and
conditions as the Committee may prescribe (such shares being called "Restricted
Stock"), which restrictions may include, without limitation, restrictions
concerning voting rights and transferability and restrictions based on duration
of employment with the Company, Company performance and individual performance.
Each certificate for Restricted Stock shall be registered in the name of the
Participant and deposited, together with a stock power endorsed in blank, with
the Company.
A-3
<PAGE>
(ii) Restrictions. There shall be established for each Restricted Stock award a
restriction period (the "Restriction Period") of such length as shall be
determined by the Committee. Shares of Restricted Stock may not be sold,
assigned, transferred, pledged or otherwise encumbered, except as hereinafter
provided, during the Restriction Period. Unless otherwise provided by the
Committee, except for such restrictions on transfer and such other restrictions
as the Committee may impose, the Participant shall have all the rights of a
holder of common stock as to such Restricted Stock. The Committee, in its sole
discretion, may permit or require the payment of cash dividends to be deferred
and, if the Committee so determines, reinvested in additional Restricted Stock
or otherwise invested. At the expiration of the Restriction Period, the
Corporation shall redeliver to the Participant (or the Participant's or
designated beneficiary under Section 6(h), or, if none, the Participant's legal
representative) the certificates deposited pursuant to this paragraph.
(iii) Forfeiture/Repurchase of Restricted Stock. Except as provided by the
Committee at the time of grant or otherwise, upon a termination of employment
for any reason during the Restriction Period all shares still subject to
restriction shall be forfeited by the Participant or at the discretion of the
Committee may be repurchased by the Company at a price to be determined by the
Committee.
6. MISCELLANEOUS PROVISIONS.
(a) Administration. The Plan shall be administered by the Committee. Subject to
the limitations of the Plan, the Committee shall have the sole and complete
authority to: (i) select Participants in the plan; (ii) subject to Section 3,
to make awards in such forms and amounts as it shall determine, including the
determination as to whether such Options are to be ISOs; (iii) to impose such
limitations, restrictions and conditions upon such awards as it shall deem
appropriate, (iv) to interpret the Plan and the agreements pursuant to which
Options, Restricted Stock or SARs are granted or awarded, and to adopt, amend
and rescind administrative guidelines and other rules and regulations relating
to the Plan, (v) to correct any defect or omission or to reconcile any
inconsistency in the Plan or in any award granted hereunder and (vi) to make
all other determinations and to take all other actions necessary or advisable
for the implementation and administration of the Plan. Any such interpretations
and rules with respect to ISOs shall be consistent with the provisions of
Section 422 of the Code. The actions and determinations of the Committee or its
delegates on matters within its authority shall be conclusive and binding upon
the Company, all the Participants and all other interested persons, subject to
such allocation to its Affiliates and operating units as it deems appropriate.
The Committee may, to the extent that any such action will not prevent the Plan
from complying with the Rule 16b-3 or Section 162(m) of the Code, delegate any
of its authority hereunder to such persons as it deems appropriate.
(b) Professional Assistance; Good Faith Actions. All expenses and liabilities
which members of the Committee incur in connection with the administration of
this Plan shall be borne by the Company. The Committee may employ attorneys,
consultants, accountants, appraisers, brokers, or other persons. The Committee,
the Company and the Company's officers and Directors shall be entitled to rely
upon the advice, opinions or valuations of any such persons. No members of the
Committee or Board shall be personally liable for any action, determination or
interpretation made in good faith with respect to this Plan, Options, awards of
Restricted Stock or SARs, and all members of the Committee and the Board shall
be fully protected by the Company in respect of any such action, determination
or interpretation.
(c) Written Agreement. Each award shall be evidenced by a written agreement,
which shall be executed by the Participant and an authorized officer of the
Company and which shall contain such terms and conditions as the Committee
shall determine, consistent with this Plan. Stock Option Agreements evidencing
Options intended to qualify as performance-based compensation as described in
Section 162(m)(4)(C) of the Code shall contain such terms and conditions as may
be necessary to meet the applicable provisions of Section 162(m) of the Code.
Stock Option Agreements evidencing ISOs shall contain such terms and conditions
as may be necessary to meet the applicable provisions of Section 422 of the
Code.
A-4
<PAGE>
(d) Non-Transferability. Subject to the provisions of paragraph 6(h), no award
under the Plan and no interest therein, shall be transferable by the
Participant otherwise than by will or the laws of descent and distribution or
pursuant to a QDRO, unless and until such rights or awards have been exercised,
or the shares underlying such rights or awards have been issued, and all
restrictions applicable to such shares have lapsed. All awards shall be
exercisable or received during the Participant's lifetime only by the
Participant or the Participant's legal representative. Any purported transfer
contrary to this provision will nullify the award. During the lifetime of the
Participant, only he may exercise an Option or other right or award (or any
portion thereof) granted to him under the Plan, unless it has been disposed of
pursuant to a QDRO. After the death of the Participant, any exercisable portion
of an Option or other right or award may, prior to the time when such portion
becomes unexercisable under the Plan or the applicable Stock Option Agreement
or other agreement, be exercised by his beneficiary designated under 6(h) or,
if none, his personal representative or by any person empowered to do so under
the deceased Participant's will or under the then applicable laws of descent
and distribution.
(e) Adjustments Upon Certain Changes. In the event of a reorganization,
recapitalization, spin-off, stock dividend, stock split, combination,
reclassification, reverse stock split, merger, consolidation, split-up,
spinoff, repurchase, liquidation, dissolution, or sale, transfer, exchange or
other disposition of all or substantially all of the assets of the Company, or
exchange of Common Stock or other securities of the Company, issuance of
warrants or other rights to purchase Common Stock or other securities of the
Company, or other similar corporate transaction or event or other increase or
reduction in the number of issued shares of common stock, the Committee may, in
order to prevent the dilution or enlargement of rights under awards, make such
adjustments in the number and type of shares authorized by the Plan, the number
and type of shares covered by, or with respect to which payments are measured
under, outstanding awards and the exercise prices specified therein as may be
determined to be appropriate and equitable. In the event of any of the events
or transactions described in the preceding sentence, a change in control, or
similar transaction by the Company or any unusual or nonrecurring transactions
or events affecting the Company, any affiliate of the Company, or the financial
statements of the Company or any affiliate, or of changes in applicable laws,
regulations, or accounting principles, if the Committee determines that such
action is appropriate in order to prevent dilution or enlargement of the
benefits or potential benefits intended to be made available under the Plan or
with respect to any option, right or other award under this Plan, to facilitate
such transactions or events or to give effect to such changes in laws,
regulations or principles, the Committee in its discretion is hereby authorized
to provide in the agreement evidencing any award or by action taken prior to
the occurrence of such transaction or event: (i) for adjustments to such award
in order to prevent the dilution or enlargement of rights thereunder or to
provide for acceleration of benefits thereunder; (ii) for either the purchase
of any such Option, SAR, or any Restricted Stock for an amount of cash equal to
the amount that could have been attained upon the exercise of such option,
right or award or realization of the Participant's rights had such option,
right or award been currently exercisable or payable or fully vested or the
replacement of such option, right or award with other rights or property
selected by the Committee in its sole discretion; (iii) that it cannot be
exercised after such event; (iv) that upon such event, such option, right or
award be assumed by the successor or survivor corporation, or a parent or
subsidiary thereof, or shall be substituted for by similar options, rights or
awards covering the stock of the successor or survivor corporation, or a parent
or subsidiary thereof, with appropriate adjustments as to the number and kind
of shares and prices; and (v) that the restrictions imposed under a Restricted
Stock Agreement upon some or all shares of Restricted Stock may be terminated,
and some or all shares of such Restricted Stock may cease to be subject to
repurchase or forfeiture under Section 5(c)(iv) after such event. With respect
to Options and SARs intended to qualify as performance-based compensation under
Section 162(m), no adjustment or action described in this Section 6(e) or in
any other provision of the Plan shall be authorized to the extent that such
adjustment or action would cause the Plan to violate Section 422(b)(1) of the
Code or would cause such Option or SAR to fail to so qualify under Section
162(m), as the case may be, or any successor provisions thereto. Furthermore,
no such adjustment or action shall be authorized to the extent such adjustment
or action would result in short-swing profits liability under Section 16 or
violate the exemptive conditions of Rule 16b-3 unless the Committee determines
that the option or other award is not to comply with such exemptive conditions.
(f) Tax Withholding. The Committee shall have the power to withhold, or require
a Participant to remit to the Company, an amount to satisfy any withholding or
other tax due with respect to any
A-5
<PAGE>
amount payable and/or shares issuable under the Plan, and the Committee may
defer such payment or issuance unless indemnified to its satisfaction. Subject
to the consent of the Committee, a Participant may make an irrevocable election
to have shares of common stock otherwise issuable under an award withheld,
tender back to the Company shares of common stock received pursuant to an award
or deliver to the Company previously-acquired shares of common stock having a
fair market value sufficient to satisfy all or part of the Participant's
estimated tax obligations associated with the transaction. Such election must
be made by a Participant prior to the date on which the relevant tax obligation
arises. The Committee may disapprove of any election and may limit, suspend or
terminate the right to make such elections.
(g) Listing and Legal Compliance. The Committee may suspend the exercise or
payment of any award so long as it determines that securities exchange listing
or registration or qualification under any securities laws is required in
connection therewith and has not been completed on terms acceptable to the
Committee. The Company shall not be required to issue or deliver any
certificate or certificates for shares of stock purchased upon the exercise of
any Option or portion thereof prior to fulfillment of all of the following
conditions:
(i) The admission of such shares to listing on all stock exchanges on which
such class of stock is then listed;
(ii) The completion of any registration or other qualification of such
shares under any state or federal law, or under the rulings or regulations
of the Securities and Exchange Commission or any other governmental
regulatory body which the Committee or Board shall, in its absolute
discretion, deem necessary or advisable;
(iii) The obtaining of any approval or other clearance from any state or
federal governmental agency which the Committee shall, in its absolute
discretion, determine to be necessary or advisable;
(iv) The lapse of such reasonable period of time following the exercise of
the Option as the Committee may establish from time to time for reasons of
administrative convenience; and
(v) The receipt by the Company of full payment for such shares, including
payment of any applicable withholding tax.
The Committee may, in its absolute discretion, also take whatever additional
actions it deems appropriate to effect such compliance including, without
limitation, placing legends on share certificates and issuing stop-transfer
notices to agents and registrars.
(h) Beneficiary Designation. Subject to paragraph 6(d), Participants may name,
from time to time, beneficiaries (who may be named contingently or
successively) to whom benefits under the Plan are to be paid in the event of
their death before they receive any or all of such benefit. Each designation
will revoke all prior designations by the same Participant, shall be in a form
prescribed by the Committee, and will be effective only when filed by the
Participant in writing with the Committee during the Participant's lifetime. In
the absence of any such designation, benefits remaining unpaid at the
Participant's death shall be paid to the Participant's estate.
(i) Rights of Participants. Nothing in the Plan shall interfere with or limit
in any way the right of the Company to terminate any Participant's employment
at any time, nor confer upon any Participant any right to continue in the
employ of the Company for any period of time or to continue his or her present
or any other rate of compensation. No employee shall have a right to be
selected as a Participant, or, having been so selected, to be selected again as
a Participant.
(j) Amendment, Suspension and Termination of Plan. This Plan will terminate and
no Options, SARs or Restricted Stock may be granted after August 14, 2006. The
Board of Directors of the Committee may suspend or terminate the Plan or any
portion thereof at any time before August 14, 2006 and may amend it from time
to time in such respects as the Board of Directors or the Committee may deem
advisable; provided, however, that no such amendment shall be made without
stockholder approval to the extent such approval is required by law, agreement
or the rules of any exchange upon which the common stock is listed. No such
amendment, suspension or termination shall impair the
A-6
<PAGE>
rights of Participants under outstanding awards without the consent of the
Participants affected thereby or make any change that would disqualify the
Plan, or any other plan of the Company intended to be so qualified, from the
exemption provided by Rule 16b-3. No such amendment shall be made that would
cause the options and the SARs from qualifying as performance based
compensation as that term is used Section 162(m) of the Code.
The Committee may amend or modify any award in any manner to the extent that
the Committee would have had the authority under the Plan to initially grant
such award. No such amendment or modification shall impair the rights of any
Participant under any award without the consent of such Participant.
(k) Effective Date of Plan. The Plan as amended and restated shall become
effective on July 1, 1998. This Plan will be submitted for the approval of the
Company's stockholders within twelve months after the date of the Board's
initial adoption of the Plan. Options, and SARs may be granted and Restricted
Stock may be awarded prior to such stockholder approval, provided that such
Options and SARs shall not be exercisable and such Restricted Stock shall not
vest prior to the time when this Plan is approved by the stockholders, and
provided further that if such approval has not been obtained at the end of said
twelve-month period, all Options or SARs previously granted and all Restricted
Stock previously awarded under this Plan shall thereupon be canceled and become
null and void.
(l) Governing Law. This Plan and any agreements hereunder shall be
administered, interpreted and enforced under the internal laws of the State of
Delaware without regard to conflicts of laws thereof.
(m) Limitations Applicable to Section 16 Persons and Performance-Based
Compensation. Notwithstanding any other provision of this Plan, this Plan, and
any Option, SAR, or Restricted Stock granted, to any individual who is then
subject to Section 16 of the Exchange Act, shall be subject to any additional
limitations set forth in any applicable exemptive rule under Section 16 of the
Exchange Act (including any amendment to Rule 16b-3 of the Exchange Act) that
are requirements for the application of such exemptive rule. To the extent
permitted by applicable law, the Plan, Options, SARs and Restricted Stock
granted hereunder shall be deemed amended to the extent necessary to conform to
such applicable exemptive rule. Furthermore, notwithstanding any other
provision of this Plan, any Option or SAR intended to qualify as performance-
based compensation as described in Section 162(m)(4)(C) of the Code shall be
subject to any additional limitations set forth in Section 162(m) of the Code
(including any amendment to Section 162(m) of the Code) or any regulations or
rulings issued thereunder that are requirements for qualification as
performance-based compensation as described in Section 162(m)(4)(C) of the
Code, and this Plan shall be deemed amended to the extent necessary to conform
to such requirements.
(n) Consideration. In all cases, legal consideration shall be required for each
issuance of Options, Restricted Stock and SARs.
IN WITNESS WHEREOF, the Board of Directors has caused this Plan as amended and
restated to be signed by its duly appointed officers and its corporate seal to
be hereunto affixed as of this 1st day of July 1998.
/s/ James R. Wilson
By: _________________________________
Chairman of the Board, President
and Chief Executive Officer
--Seal--
Attested:
/s/ Edwin M. North
By: _________________________________
Corporate Secretary
A-7
<PAGE>
EXHIBIT B
FINANCIAL INFORMATION
Management's Report on Financial Statements F-2
Report of Ernst & Young LLP, Independent Auditors F-3
Consolidated Statements of Income F-4
Consolidated Balance Sheets F-6
Consolidated Statements of Cash Flows F-8
Consolidated Statements of Stockholders' Equity F-9
Notes to Consolidated Financial Statements F-10
Management's Discussion and Analysis of Financial Condition
and Results of Operations F-30
Selected Financial Data F-46
F-1
<PAGE>
MANAGEMENT'S REPORT ON FINANCIAL STATEMENTS
Management has prepared, and is responsible for, the consolidated financial
statements and all related financial information contained in the Annual
Report. The consolidated financial statements, which include amounts based on
estimates and judgments, were prepared in accordance with generally accepted
accounting principles appropriate in the circumstances and applied on a
consistent basis. Other financial information in this report is consistent with
that in the consolidated financial statements.
Management maintains an accounting system and related internal controls which
it believes provide reasonable assurance, at appropriate cost, that
transactions are properly executed and recorded, that assets are safeguarded,
and that accountability for assets is maintained. An environment that provides
an appropriate level of control is maintained and monitored and includes
examinations by an internal audit staff.
Management recognizes its responsibilities for conducting the Company's affairs
in an ethical and socially responsible manner. The Company has written
standards of business conduct, including its business code of ethics which
emphasizes the importance of personal and corporate conduct, that demand
compliance with federal and state laws governing the Company. The importance of
ethical behavior is regularly communicated to all employees through ongoing
education and review programs designed to create a strong compliance
environment.
The Audit Committee of the Board of Directors is composed of four outside
directors. This Committee meets periodically and also meets separately with
representatives of the independent auditors, Company officers and the internal
auditors to review their activities.
The consolidated financial statements have been audited by Ernst & Young LLP,
independent auditors, whose report follows.
[SIGNATURE OF RICHARD L. CORBIN
APPEARS HERE]
Richard L. Corbin
Senior Vice President and
Chief Financial Officer
F-2
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Stockholders and Board of Directors
Cordant Technologies Inc.:
We have audited the accompanying consolidated balance sheets of Cordant
Technologies Inc. as of June 30, 1998 and 1997, and the related consolidated
statements of income, stockholders' equity, and cash flows for each of the
three years in the period ended June 30, 1998. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Cordant
Technologies Inc. at June 30, 1998 and 1997, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended June 30, 1998, in conformity with generally accepted accounting
principles.
/s/ ERNST & YOUNG LLP
Salt Lake City, Utah
July 31, 1998
F-3
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED JUNE 30
------------------------
(IN MILLIONS, EXCEPT PER SHARE DATA) 1998 1997 1996
- - ------------------------------------------------------------------------------
NET SALES $1,779.3 $890.1 $889.5
OPERATING EXPENSES:
COST OF SALES 1,368.5 723.7 738.7
GENERAL AND ADMINISTRATIVE 170.5 80.5 69.8
RESEARCH AND DEVELOPMENT 24.4 12.5 13.3
RESTRUCTURING AND IMPAIRMENT (2.2) 5.9
- - ------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 1,563.4 814.5 827.7
INCOME FROM OPERATIONS 215.9 75.6 61.8
EQUITY INCOME OF AFFILIATES 15.6 30.5 4.5
INTEREST INCOME 10.0 10.9 30.2
INTEREST EXPENSE (16.2) (1.7) (3.9)
OTHER, NET (2.7)
- - ------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES, MINORITY INTEREST,
AND EXTRAORDINARY ITEM 222.6 115.3 92.6
INCOME TAXES 76.1 32.9 34.3
- - ------------------------------------------------------------------------------
INCOME BEFORE MINORITY INTEREST AND
EXTRAORDINARY ITEM 146.5 82.4 58.3
MINORITY INTEREST (20.5)
- - ------------------------------------------------------------------------------
INCOME BEFORE EXTRAORDINARY ITEM 126.0 82.4 58.3
EXTRAORDINARY ITEM--LOSS ON EARLY RETIREMENT
OF DEBT (7.1)
- - ------------------------------------------------------------------------------
NET INCOME $ 118.9 $ 82.4 $ 58.3
==============================================================================
INCOME PER SHARE BEFORE EXTRAORDINARY ITEM:
BASIC $ 3.45 $ 2.26 $ 1.60
DILUTED $ 3.34 $ 2.21 $ 1.57
NET INCOME PER SHARE:
BASIC $ 3.26 $ 2.26 $ 1.60
DILUTED $ 3.15 $ 2.21 $ 1.57
(a) Since December 2, 1997, Cordant Technologies, Inc. has consolidated the
financial statements of its 62 percent ownership interest in Howmet
International Inc. Prior to December 2, 1997, Cordant Technologies Inc.'s
then 49 percent in Howmet International Inc. was accounted for under the
equity method.
See notes to consolidated financial statements.
F-4
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
F-5
<PAGE>
CONSOLIDATED BALANCE SHEETS
JUNE 30
---------------
(IN MILLIONS) 1998 1997
- - --------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
CASH AND CASH EQUIVALENTS $ 17.4 $ 51.4
RECEIVABLES 275.5 146.4
INVENTORIES 261.4 84.6
DEFERRED INCOME TAXES AND PREPAID EXPENSES 52.8 29.3
RESTRICTED TRUST (A) 726.9 --
- - --------------------------------------------------------------------------
TOTAL CURRENT ASSETS 1,334.0 311.7
PROPERTY, PLANT AND EQUIPMENT
LAND 32.3 17.2
BUILDINGS AND IMPROVEMENTS 315.2 231.2
MACHINERY AND EQUIPMENT 673.1 332.7
CONSTRUCTION IN PROGRESS 16.5 14.0
- - --------------------------------------------------------------------------
TOTAL PROPERTY, PLANT AND EQUIPMENT 1,037.1 595.1
LESS ALLOWANCES FOR DEPRECIATION (400.5) (311.9)
- - --------------------------------------------------------------------------
NET PROPERTY, PLANT AND EQUIPMENT 636.6 283.2
OTHER ASSETS
EQUITY INVESTMENT IN HOWMET 178.0
COSTS IN EXCESS OF NET ASSETS OF BUSINESSES
ACQUIRED, NET 569.0 26.7
PATENTS AND OTHER INTANGIBLE ASSETS, NET 125.6 14.1
OTHER NONCURRENT ASSETS 113.1 40.7
- - --------------------------------------------------------------------------
TOTAL OTHER ASSETS 807.7 259.5
- - --------------------------------------------------------------------------
TOTAL ASSETS $2,778.3 $854.4
- - --------------------------------------------------------------------------
(a) The Restricted Trust holds a note receivable from Pechiney S.A. and related
letters of credit that secure Pechiney S.A.'s agreement to repay the
Pechiney Notes due January 2, 1999. Management believes that it is
extremely remote that the Company will use any assets other than those in
the Restricted Trust to satisfy any payments related to the Pechiney Notes
(See Note 6. Restricted Trust and Related Notes Payable).
(b) Since December 2, 1997, Cordant Technologies Inc. has consolidated the
financial statements of its 62 percent ownership interest in Hownet
International Inc. Prior to December 2, 1997, Cordant Technologies Inc.'s
then 49 percent interest in Hownet International Inc. was accounted for
under the equity method.
See notes to consolidated financial statements.
F-6
<PAGE>
CONSOLIDATED BALANCE SHEETS
JUNE 30
-----------------
(IN MILLIONS) 1998 1997
- - ----------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
SHORT-TERM DEBT $ 43.1 $ 22.7
ACCOUNTS PAYABLE 106.1 36.3
ACCRUED COMPENSATION 87.0 43.1
OTHER ACCRUED EXPENSES 211.6 37.4
PECHINEY NOTES (A) 726.9
- - ----------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 1,174.7 139.5
NONCURRENT LIABILITIES
ACCRUED RETIREE BENEFITS 166.9 70.4
DEFERRED INCOME TAXES 42.3 41.3
ACCRUED INTEREST AND OTHER NONCURRENT LIABILITIES 202.4 80.3
LONG-TERM DEBT 462.9 1.8
- - ----------------------------------------------------------------------------
TOTAL NONCURRENT LIABILITIES 874.5 193.8
COMMITMENTS AND CONTINGENT LIABILITIES
MINORITY INTEREST 119.6
STOCKHOLDERS' EQUITY
COMMON STOCK (PAR VALUE $1.00 PER SHARE)
AUTHORIZED--200 SHARES
ISSUED--41.1 SHARES AT JUNE 30, 1998, AND 20.5
SHARES AT JUNE 30, 1997 (INCLUDES TREASURY SHARES) 41.1 20.5
ADDITIONAL PAID-IN CAPITAL 46.8 44.7
RETAINED EARNINGS 598.0 514.3
CUMULATIVE TRANSLATION ADJUSTMENT (3.9)
- - ----------------------------------------------------------------------------
682.0 579.5
LESS COMMON STOCK IN TREASURY, AT COST
(4.6 SHARES AT JUNE 30, 1998 AND 2.1 SHARES AT JUNE 30,
1997) (72.5) (58.4)
- - ----------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 609.5 521.1
- - ----------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $2,778.3 $854.4
============================================================================
(a) The Restricted Trust holds a note receivable from Pechiney S.A. and related
letters of credit that secure Pechiney S.A.'s agreement to repay the
Pechiney Notes due January 2, 1999. Management believes that it is
extremely remote that the Company will use any assets other than those in
the Restricted Trust to satisfy any payments related to the Pechiney Notes
(See Note 6. Restricted Trust and Related Notes Payable).
(b) Since December 2, !997, Cordant Technologies Inc. has consolidated the
financial statements of its 62 percent ownership interest in Howmet
International Inc. Prior to December 2, 1997, Cordant Technologies Inc.'s
then 49 percent interest in Howmet International Inc. was accounted for
under the equity method.
See notes to consolidated financial statements.
F-7
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED JUNE 30
---------------------
(IN MILLIONS) 1998 1997 1996
- - -------------------------------------------------------------------------------
OPERATING ACTIVITIES
NET INCOME $118.9 $82.4 $58.3
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
RESTRUCTURING AND IMPAIRMENT (2.2) 5.9
EXTRAORDINARY ITEM 7.1
MINORITY INTEREST 20.5
DEPRECIATION 53.9 30.0 33.0
AMORTIZATION 21.7 10.2 9.0
EQUITY INCOME (15.6) (30.5) (4.5)
DEFERRED INCOME TAXES 2.5 (7.8) (11.7)
CHANGES IN OPERATING ASSETS AND LIABILITIES:
RECEIVABLES 21.5 16.1 103.9
INVENTORIES (12.1) 6.1 41.5
ACCOUNTS PAYABLE AND ACCRUED EXPENSES (11.4) 1.8 (17.3)
INCOME TAXES 9.7 9.5 (9.5)
OTHER -- NET (8.6) (1.5) (25.8)
- - -------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 208.1 114.1 182.8
INVESTING ACTIVITIES
ACQUISITIONS, NET OF ACQUIRED CASH (430.2) (146.0)
PURCHASES OF PROPERTY, PLANT AND EQUIPMENT (72.8) (33.1) (29.1)
PROCEEDS FROM DISPOSAL OF ASSETS 4.8 2.6 6.1
- - -------------------------------------------------------------------------------
NET CASH USED FOR INVESTING ACTIVITIES (498.2) (30.5)(169.0)
FINANCING ACTIVITIES
NET CHANGE IN SHORT-TERM DEBT 37.2 (38.0) 2.5
ISSUANCE OF LONG-TERM DEBT 642.6
REPAYMENT OF LONG-TERM DEBT (382.4) (.1) (.2)
PREMIUMS PAID ON EARLY RETIREMENT OF DEBT (13.7)
PURCHASE OF COMMON STOCK FOR TREASURY (18.7) (4.3)
STOCK OPTION TRANSACTIONS 6.7 4.0 2.5
DIVIDENDS PAID (14.6) (13.2) (12.4)
- - -------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED FOR) FINANCING
ACTIVITIES 257.1 (47.3) (11.9)
- - -------------------------------------------------------------------------------
FOREIGN CURRENCY RATE CHANGES (1.0)
- - -------------------------------------------------------------------------------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (34.0) 36.3 1.9
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 51.4 15.1 13.2
- - -------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 17.4 $51.4 $15.1
- - -------------------------------------------------------------------------------
(a) Since December 2, 1997, Cordant Technologies Inc. has consolidated the
financial statements of its 62 percent ownership interest in Howmet
International Inc. Prior to December 2, 1997, Cordant Technologies Inc.'s
then 49 percent interest in Howmet International Inc. was accounted for
under the equity method.
See notes to consolidated financial statements.
F-8
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ADDITIONAL CUMULATIVE TOTAL
COMMON PAID-IN RETAINED TREASURY TRANSLATION STOCKHOLDERS'
(IN MILLIONS) STOCK CAPITAL EARNINGS STOCK ADJUSTMENT EQUITY
- - ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JUNE 30, 1995 $20.5 $44.5 $399.2 $(60.4) $403.8
- - ----------------------------------------------------------------------------------------------------------------
NET INCOME 58.3 58.3
DIVIDENDS PAID (12.4) (12.4)
TREASURY STOCK PURCHASES (4.3) (4.3)
STOCK OPTIONS EXERCISED
AND RELATED INCOME TAX
BENEFITS (.3) 2.8 2.5
- - ----------------------------------------------------------------------------------------------------------------
BALANCE, JUNE 30, 1996 20.5 44.2 445.1 (61.9) 447.9
- - ----------------------------------------------------------------------------------------------------------------
NET INCOME 82.4 82.4
DIVIDENDS PAID (13.2) (13.2)
STOCK OPTIONS EXERCISED
AND RELATED INCOME TAX
BENEFITS .5 3.5 4.0
- - ----------------------------------------------------------------------------------------------------------------
BALANCE, JUNE 30, 1997 20.5 44.7 514.3 (58.4) 521.1
- - ----------------------------------------------------------------------------------------------------------------
NET INCOME 118.9 118.9
CURRENCY TRANSLATION
ADJUSTMENT (3.9) (3.9)
DIVIDENDS PAID (14.6) (14.6)
STOCK SPLIT 20.6 (20.6)
TREASURY STOCK PURCHASES (18.7) (18.7)
STOCK OPTIONS EXERCISED
AND RELATED INCOME TAX
BENEFITS 2.1 4.6 6.7
- - ----------------------------------------------------------------------------------------------------------------
BALANCE, JUNE 30, 1998 $41.1 $46.8 $598.0 $(72.5) $(3.9) $609.5
================================================================================================================
</TABLE>
CHANGES IN COMMON STOCK SHARES
<TABLE>
<CAPTION>
COMMON TREASURY
(IN MILLIONS) STOCK STOCK
- - --------------------------------------------------------------------------------------------
<S> <C> <C>
BALANCE, JUNE 30, 1995 20.5 (2.3)
COMMON STOCK PURCHASE (.1)
STOCK OPTION EXERCISES AND RELATED TAX BENEFITS .1
- - --------------------------------------------------------------------------------------------
BALANCE, JUNE 30, 1996 20.5 (2.3)
- - --------------------------------------------------------------------------------------------
STOCK OPTION EXERCISES AND RELATED TAX BENEFITS .2
- - --------------------------------------------------------------------------------------------
BALANCE, JUNE 30, 1997 20.5 (2.1)
- - --------------------------------------------------------------------------------------------
STOCK OPTION EXERCISES AND RELATED TAX BENEFITS .2
STOCK SPLIT 20.6 (2.2)
PURCHASE OF COMMON STOCK FOR TREASURY (.5)
- - --------------------------------------------------------------------------------------------
BALANCE, JUNE 30, 1998 41.1 (4.6)
============================================================================================
</TABLE>
See notes to consolidated financial statements.
F-9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES
NAME CHANGE: On May 5, 1998, Thiokol Corporation announced effective
immediately the change of its corporate name to Cordant Technologies Inc. (the
Company or Cordant). The Company's three business segments retained their
present names (Thiokol Propulsion, Huck International, Inc., and Howmet
International Inc.) and are referred to as a part of Cordant Technologies.
FISCAL YEAR CHANGE: The Company will change its financial reporting fiscal
year-end from June 30 to a calendar year effective with its report for the
quarter ended September 30, 1998. The change by the Company is to coordinate
Cordant and Howmet reporting periods and to reduce the confusion that
accompanies a fiscal year versus a calendar year. Howmet currently reports
separately on a calendar year basis. All discussions of future events in this
annual report are on a fiscal year basis to be comparative with the historical
information presented.
BASIS OF CONSOLIDATION AND USE OF ESTIMATES: The consolidated financial
statements include the accounts of Cordant Technologies Inc. and its
subsidiaries. The Company participates in teaming arrangements and records its
share of sales and profits related to such ventures on the percentage of
completion method. The Company increased its ownership interest in Howmet
International Inc. (Howmet) from 49 percent to 62 percent on December 2, 1997.
Accordingly, beginning with December 1997, earnings and cash flows for Howmet
have been consolidated with Cordant Technologies' and the balance sheets at
June 30, 1998 have been consolidated. Minority interest in income and equity is
also reported for the 38 percent of Howmet the Company does not own. Previous
to December 2, 1997, Howmet's results were accounted for under the equity
method. All significant intercompany accounts and transactions have been
eliminated from the consolidated financial statements.
The consolidated financial statements are prepared in conformity with generally
accepted accounting principles, which require management to make estimates and
assumptions. Estimates of contract costs and revenues, valuation accounts and
reserves are utilized in the earnings recognition process that affects reported
amounts in the financial statements and accompanying notes. Actual results may
differ from those estimates.
REVENUE RECOGNITION UNDER LONG-TERM CONTRACTS: Propulsion systems sales
encompass products and services performed principally under contracts and
subcontracts with various United States Government (government) agencies and
aerospace prime contractors. Sales under cost-type contracts are recognized as
costs are incurred and include a portion of total estimated earnings to be
realized in the ratio that costs incurred relate to estimated total costs.
Sales under fixed-price-type contracts are recognized on the percentage of
completion method, when deliveries are made or upon completion of specified
tasks. Cost or performance incentives are incorporated into certain contracts
and are recognized when awards are earned, or when realization is reasonably
assured and amounts can be estimated. Adjustments in estimates, which can
affect both revenues and earnings, are made in the period in which the
information necessary to make the adjustment becomes available. Provisions for
estimated losses on contracts are recorded when identified.
CASH AND CASH EQUIVALENTS: Cash and cash equivalents represent cash and short-
term investments that are highly liquid maturing within three months.
INVENTORIES: Inventories are stated at the lower of cost or market. Inventories
for the Investment Castings segment are determined by both the first-in, first-
out (FIFO) and last-in, first-out (LIFO) methods. Inventories for the fastening
systems segment are determined by the FIFO method.
Propulsion systems segment inventories include estimated recoverable costs
related to long-term fixed price contracts, including direct production costs
and allocable indirect costs, less related progress payments received. In
accordance with industry practice, such costs include amounts that are not
expected to be realized within one year. The government may acquire title to,
or a security interest in, certain inventories as a result of progress payments
made on contracts and programs.
F-10
<PAGE>
PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment are carried at
cost and depreciated over the assets' estimated useful lives, using either the
straight-line or accelerated methods. Building and improvements' useful lives
vary between 15 and 40 years and other assets' lives vary between 3 and 20
years.
INTANGIBLES: Costs in excess of the net assets acquired (goodwill), patents,
and other intangible assets are being amortized on a straight-line basis over
periods between 10 and 40 years. Accumulated amortization amounted to $56.5 and
$40.9 million at June 30, 1998 and 1997, respectively.
IMPAIRMENT OF LONG-LIVED ASSETS: In accordance with Statement of Financial
Accounting Standards (SFAS) No. 121 "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to Be Disposed Of," the Company records
impairment losses on long-lived assets used in operations when events and
circumstances indicate that the assets might be impaired and the undiscounted
cash flows estimated to be generated by those assets are less than net book
value.
The Company assesses on an ongoing basis the recoverability of goodwill based
on estimates of future undiscounted cash flows for the applicable business
compared to net book value of related goodwill. If the future undiscounted cash
flow estimate were less than net book value, net book value of the goodwill
would then be reduced to fair value based on an estimate of discounted cash
flow. The Company also evaluates the amortization periods of assets, including
goodwill and other intangible assets, to determine whether events or
circumstances warrant revised estimates of useful lives.
CONTINGENT MATTERS: The Company accrues costs for contingent matters when it is
probable that a liability has been incurred and the amount can be reasonably
determined. At the time a liability is recognized, a receivable is recorded for
the estimated future recovery from third parties, insurance carriers, or from
the government. Costs allocated to commercial business or not otherwise
recoverable from third parties are expensed when the liability is recorded.
Except for current amounts receivable and payable, contingent amounts are
included in "other noncurrent assets" and in "accrued interest and other
noncurrent liabilities."
FOREIGN CURRENCY TRANSLATION: The financial statements of the Company's foreign
operations are translated into United States dollars in accordance with SFAS
No. 52, "Foreign Currency Translation." The Company's international business
units conduct their business utilizing their local currency as the functional
currency. Assets and liabilities of the Company's foreign subsidiaries are
translated at year-end exchange rates. Revenues and expenses are translated
into U.S. dollars at average rates of exchange prevailing during the period.
Unrealized currency translation adjustments are deferred and included in the
equity section of the balance sheets, whereas transaction gains and losses are
recognized currently in the statements of income.
DERIVATIVE FINANCIAL INSTRUMENTS: Derivative financial instruments are utilized
by the Company to reduce foreign currency risks in accordance with Company
policy approved by the Board of Directors. The Company does not hold or issue
derivative financial instruments for trading purposes. The Company enters into
foreign exchange contracts to minimize fluctuations in the value of payments
due international vendors and the value of foreign currency denominated
receipts. Forward foreign exchange contracts obligate the Company to exchange
predetermined amounts of specified foreign currencies at specified exchange
rates on specified dates or to make an equivalent U.S. dollar payment equal to
the value of such exchange. The forward foreign exchange contracts used by the
Company are directly related to a particular asset, liability or transaction
for which a commitment is in place. In accordance with hedge accounting, gains
and losses on foreign currency transaction hedges are recognized in income and
offset the foreign exchange gains and losses when the underlying transaction is
settled. Unrealized changes in fair value of contracts no longer effective as
hedges are recognized in income at such time and marked to market until their
expiration. The impact on the financial position and results of operations from
likely changes in foreign exchange rates is mitigated by minimizing risk
through hedging transactions related to commitments.
INCOME TAXES: Provisions for federal, state, local, and foreign income taxes
are calculated based on current tax laws. The provision for income taxes
includes, in the current period, the cumulative effect of any changes in tax
rates from those used previously in determining deferred tax assets and
F-11
<PAGE>
liabilities. Deferred taxes are provided to recognize the income tax effects of
amounts that are included in different reporting periods for financial
statement and tax purposes.
NEW ACCOUNTING STANDARDS: In February 1998, the Financial Accounting Standards
Board (FASB) issued SFAS No. 132, "Employers' Disclosures about Pensions and
Other Postretirement Benefits." This statement revises employers' disclosures
about pensions and other postretirement benefit plans. It does not change the
measurement or recognition of those plans. This statement is effective for
fiscal years beginning after December 15, 1997, and will be adopted by the
Company in its annual report for its newly adopted calendar year 1998.
In June 1998, FASB issued SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities." This statement establishes accounting and reporting
standards for derivative instruments and for hedging activities. This statement
will require the Company to recognize all derivatives on the balance sheet at
fair value. Derivatives that are not hedges must be adjusted to fair value
through income. If the derivative is a hedge, depending on the nature of the
hedge, changes in the fair value of derivatives will either be offset against
the change in fair value of the hedged assets, liabilities, or firm commitments
through earnings or recognized in other comprehensive income until the hedged
item is recognized in earnings. The ineffective portion of a derivative's
change in fair value will be immediately recognized in earnings. The Company
has not yet determined what the effect of SFAS No. 133 will be on the earnings
and financial position of the Company. This statement is effective for fiscal
years beginning after June 15, 1999. The Company expects to adopt the new
statement beginning on January 1, 2000.
The Company will adopt SFAS No. 130 "Reporting Comprehensive Income" and SFAS
No. 131 "Disclosures about Segments of an Enterprise and Related Information"
in its new calendar year 1998 statements. Adoption of the two new standards is
not expected to have a significant impact on the Company's financial
statements.
RECLASSIFICATION: Certain reclassifications were made to the 1996 and 1997
financial statements to conform with the 1998 presentation.
NOTE 2. RECEIVABLES
The components of receivables are as follows:
JUNE 30
--------------
(IN MILLIONS) 1998 1997
- - ------------------------------------------------------------------------------
TRADE RECEIVABLES:
TRADE ACCOUNTS RECEIVABLE $169.3 $ 55.8
RETAINED RECEIVABLES 42.6
ALLOWANCE FOR DOUBTFUL ACCOUNTS (7.1) (1.8)
- - ------------------------------------------------------------------------------
TOTAL TRADE RECEIVABLES 204.8 54.0
RECEIVABLES UNDER U.S. GOVERNMENT CONTRACTS AND SUBCONTRACTS:
AMOUNTS BILLED 57.3 63.7
UNBILLED COSTS AND ACCRUED PROFITS 13.4 28.7
- - ------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT RECEIVABLES 70.7 92.4
- - ------------------------------------------------------------------------------
$275.5 $146.4
- - ------------------------------------------------------------------------------
Unbilled costs and accrued profits consist primarily of revenues recognized on
contracts that have not been billed. Such amounts are billed based on contract
terms and delivery schedules. It is expected that approximately $5.4 million of
the unbilled amounts at June 30, 1998 will not be billed within one year. Cost
and incentive-type contracts and subcontracts are subject to government audit
and review. It is anticipated that adjustments, if any, will not have a
material effect on the Company's results of operations or financial condition.
F-12
<PAGE>
Cost management award fees totaling $109.8 million, at June 30, 1998, have been
recognized on the current Space Shuttle Reusable Solid Rocket Motor (RSRM)
contract. Realization of such fees is reasonably assured based on actual and
anticipated contract cost performance. However, all cost management award fees
remain at risk until contract completion and final NASA review. The current
RSRM contract is expected to be completed in fiscal year 2001. Unanticipated
program problems which erode cost management performance could cause some or
all of the recognized cost management award fees to be reversed and would be
offset against receivable amounts from the government or be directly
reimbursed. Circumstances which could erode cost management performance
include, but are not limited to, failure of a Company supplied component,
performance problems with the RSRM leading to a major redesign and/or
requalification effort, manufacturing problems including supplier problems
which result in RSRM production interruptions or delays, and major safety
incidents.
Howmet has an agreement to sell, on a revolving basis, an undivided interest in
a defined pool of accounts receivable. At June 30, the defined pool of
outstanding accounts receivable amounted to $97.6 million. Howmet has received
$55 million from the sale of such eligible receivables to a master trust and
has deducted this amount from accounts receivable in the June 30, 1998,
consolidated balance sheets. Losses on the sale of receivables for the year
ending June 30, 1998, were $3.7 million. These losses are included in the line
captioned "Other, net" in the statements of income. At June 30, 1998, the
difference between the total eligible pool and the $55 million sold, represent
retainage on the sale in the event the receivables are not fully collected.
Howmet has retained the responsibility for servicing and collecting the
accounts receivable sold or held in the master trust. Any incremental
additional costs related to such servicing and collection efforts are not
significant.
NOTE 3. INVENTORIES
Inventories are summarized as follows:
JUNE 30
--------------
(IN MILLIONS) 1998 1997
- - -----------------------------------------------------------------------------
RAW MATERIALS AND WORK-IN-PROCESS $187.4 $ 27.0
FINISHED GOODS 74.5 55.7
INVENTORIED COSTS RELATED TO U.S. GOVERNMENT AND OTHER LONG-
TERM CONTRACTS 20.5 27.8
PROGRESS PAYMENTS RECEIVED ON LONG-TERM CONTRACTS (16.5) (25.9)
LIFO VALUATION ADJUSTMENT (4.5)
- - -----------------------------------------------------------------------------
$261.4 $ 84.6
- - -----------------------------------------------------------------------------
At June 30, 1998, inventories include $121.9 million that are valued using
LIFO. The LIFO valuation adjustment approximates the difference between the
LIFO carrying value and current replacement cost.
NOTE 4. HOWMET INTERNATIONAL INC. PURCHASE
On December 13, 1995, the Company and The Carlyle Group (Carlyle), a private
merchant bank, formed a jointly owned company, Howmet International Inc., to
acquire Howmet Corporation and the Cercast Group of companies, referred to
collectively in the financial statements as Howmet. Carlyle owned 51 percent
and Cordant owned 49 percent of the Howmet common stock. The Company's initial
equity investment in Howmet consisted of $96 million in Howmet voting common
stock, and $50 million in Howmet 9 per cent paid-in-kind, non-voting, preferred
stock. As part of this purchase, Howmet received indemnifications from the
seller for liabilities over amounts reserved relating to environmental and
certain other obligations existing at the purchase date. The Company accounted
for its 49 percent minority voting common stock investment in Howmet using the
equity method.
On December 2, 1997, the Company increased its ownership in Howmet to 62
percent by acquiring an additional 13 million shares of Howmet common stock for
approximately $183.8 million, which included the exercise of an option for 2
million shares of stock. Simultaneously with this transaction,
F-13
<PAGE>
Carlyle sold 15.35 million shares of Howmet common stock in an Initial Public
Offering. After the transactions, the Company, Carlyle, and the public own
approximately 62, 22.65 and 15.35 percent, respectively, of Howmet common
stock. The Company has an option and first right of refusal to acquire all of
Carlyle's shares at market price. This option may be exercised during a two-
year period beginning in December 1999. The Company or its affiliates are
prohibited from acquiring publicly held Howmet common shares that would reduce
public ownership below 14 percent, unless such purchase is a tender offer to
acquire all outstanding public shares.
Beginning in December 1997, Howmet's financial statements have been
consolidated with Cordant's. Excluding the Restricted Trust and the related
Pechiney Notes Payable, Howmet had total assets of $1,003,841 million and total
liabilities of $626,473 million at June 30, 1998. Operating results for the
current year include five months of Howmet's earnings reported under the equity
method and seven months of Howmet earnings on a consolidated basis. Additional
detailed financial information on Howmet is available in Howmet's Annual Report
to Stockholders incorporated by reference in Howmet's Annual Report on Form 10-
K for Howmet's fiscal year ended December 31, 1997.
The following pro forma information is not necessarily indicative of the
results which would have resulted had the acquisition occurred at the beginning
of each period presented, nor is it necessarily indicative of future results.
The unaudited consolidated pro forma results of operations assuming
consummation of the purchase of the Howmet common stock as of the beginning of
each period, are as follows:
PRO-FORMA
-------------------
TWELVE MONTHS ENDED
JUNE 30
(IN MILLIONS, EXCEPT PER SHARE DATA) -------------------
1998 1997
- - -----------------------------------------------------------------------
NET SALES $ 2,289.3 $ 2,091.1
INCOME BEFORE EXTRAORDINARY ITEM $ 124.1 $ 75.6
INCOME PER DILUTED SHARE BEFORE EXTRAORDINARY ITEM $ 3.29 $ 2.02
NET INCOME $ 117.0 $ 75.6
NET INCOME PER DILUTED SHARE $ 3.10 $ 2.02
- - -----------------------------------------------------------------------
NOTE 5. JACOBSON MANUFACTURING PURCHASE
On June 11, 1998, the Company completed the purchase of all of the common stock
of Jacobson Manufacturing Company Inc. (Jacobson) for $273.6 million and
assumed $7.3 million in liabilities. Jacobson manufactures high-quality,
custom-designed metal parts and fasteners and precision-engineered plastic
products. The acquisition of Jacobson was accounted for under the purchase
accounting method. The goodwill associated with the purchase is being amortized
over 40 years using the straight-line method. The pre-tax income for Jacobson
from June 11 through June 30 was approximately $1 million and is included in
the consolidated results of the Company with the fastening systems segment.
NOTE 6. RESTRICTED TRUST AND RELATED PECHINEY NOTES PAYABLE
In 1988, Pechiney Corporation, which was a wholly-owned subsidiary of Pechiney,
S.A., issued indebtedness maturing in 1999 (Pechiney Notes) to third parties in
connection with the purchase of American National Can Company. As a result of
the acquisition of Howmet by the Company and Carlyle, Pechiney Corporation (now
named Howmet Holdings Corporation or Holdings), became a wholly-owned
subsidiary of Howmet. The Pechiney Notes remained at Holdings, but Pechiney,
S.A., which retained American National Can Company, agreed with Howmet to be
responsible for all payments due on or in connection with the Pechiney Notes.
Accordingly, Pechiney, S.A. issued its own note to Holdings in an amount
sufficient to satisfy all obligations under the Pechiney Notes. The Pechiney,
S.A. note was deposited in a trust (Restricted Trust) for the benefit of
Holdings. If Pechiney, S.A. fails to make any payments required by its note,
the trustee under the Restricted Trust (Trustee) has irrevocable letters of
credit in the aggregate amount of $772 million issued to the Restricted Trust
by Banque Nationale de Paris (BNP), a French bank which has an A+ credit rating
from Standard and
F-14
<PAGE>
Poor's Ratings Group (S&P), to draw upon to make such payments. In the event
there is an impediment to a draw under the BNP letters of credit held by the
Trustee, the Trustee has substantially identical "back-up" letters of credit in
the aggregate amount of $772 million issued to the Restricted Trust by Caisse
des Depots et Consignations, a French bank which has an AAA credit rating from
S&P. In addition, the holders of the Pechiney Notes have a third set of letters
of credit (also issued by BNP), which can be drawn upon by such holders in the
event that principal and/or interest payments on the Pechiney Notes are not
made. Pechiney S.A. is solely responsible as reimbursement party for draws
under the various letters of credit referenced above, and by agreement with the
banks, neither Holdings nor Howmet has any responsibility therefor. However,
Holdings remains liable as the original issuer of the Pechiney Notes in the
event that Pechiney, S.A. and both banks fail to meet their obligations under
their respective letters of credit. Management believes that it is extremely
remote that Howmet will be required to use any of its assets other than those
in the Restricted Trust to satisfy any payments due on or in connection with
the Pechiney Notes. Upon repayment of the Pechiney Notes, the Restricted Trust
terminates and any assets of the Restricted Trust are to be returned to
Pechiney, S.A.
The Pechiney Notes are due on January 2, 1999, and may not be prepaid prior to
that date. Interest is at three-month London Interbank Offered Rates (LIBOR),
plus 25 basis points (5.98 percent for the quarter ended June 30, 1998), and
interest is paid quarterly. Interest expense on these notes was $43.6 million
for the twelve months ended June 30, 1998. Interest income from the Restricted
Trust for the aforementioned period was equal to the interest expense, and is
netted in the financial statements.
NOTE 7. FINANCING ARRANGEMENTS
Long term debt is summarized as follows:
JUNE 30
-----------
1998 1997
- - -----------------------------------------------------------------------------
(IN MILLIONS)
CORDANT TECHNOLOGIES 6.625% SENIOR NOTES, DUE MARCH 1, 2008 $150.0
CORDANT TECHNOLOGIES SENIOR REVOLVING CREDIT FACILITY AT 5.91%
(VARIABLE RATE) 150.0
HOWMET SENIOR REVOLVING CREDIT FACILITY AT 5.91% (VARIABLE RATE) 145.0
OTHER 18.1 $2.0
- - -----------------------------------------------------------------------------
463.1 2.0
LESS CURRENT PORTION .2 .2
- - -----------------------------------------------------------------------------
$462.9 $1.8
- - -----------------------------------------------------------------------------
Principal maturities for the succeeding five years ended June 30, are as
follows: $0 in 1999, $7.4 million in 2000, $150 million in 2001, $0 in 2002,
and $148 million in 2003.
The Company, excluding Howmet, has credit commitments from a group of banks
aggregating $300 million under revolving credit facilities, of which $150
million was available at June 30, 1998. The funds available under the credit
facilities may be used for any corporate purpose and are available through
August 1998 ($150 million) and May 2001 ($150 million). The interest rate on
the facilities is based on LIBOR plus a spread. The credit agreements and
senior notes contain covenants restricting, among other things, the Company's
ability to incur funded debt, liens, sale and leaseback transactions, and the
sale of assets.
Howmet has credit commitments from a group of banks aggregating $300 million
under a revolving credit agreement, of which $147.4 million was available at
June 30, 1998. The funds available under the credit facility may be used for
any corporate purpose and are available through December 2002. Terms of the
revolving credit facility require Howmet to meet certain interest coverage and
leverage ratios and maintain certain minimum net worth amounts. In addition,
there are restrictions that limit indebtedness, the sale of assets, and
payments for acquisitions or investments.
Cordant does not have access to Howmet cash balances except through Howmet
declaring a cash dividend to its shareholders. Howmet does not currently intend
to pay dividends.
Howmet also has an agreement to sell, on a revolving basis, an undivided
interest in a defined pool of accounts receivable (See Note 2).
F-15
<PAGE>
Short-term debt consisted of borrowings with various domestic and foreign
banks. The weighted average interest rate on short-term debt outstanding was
5.76 percent and 3.37 percent at June 30, 1998 and 1997, respectively. The
Company paid interest of $15.6, $1.7, and $4.0 million in 1998, 1997, and 1996
respectively.
NOTE 8. INCOME TAXES
The provision for taxes on income before extraordinary item follows:
(IN MILLIONS) 1998 1997 1996
- - -------------------------------------
CURRENT TAXES:
FEDERAL $60.8 $34.3 $39.3
FOREIGN 1.9 1.1 1.4
STATE 10.9 5.3 5.3
- - -------------------------------------
73.6 40.7 46.0
DEFERRED TAXES:
FEDERAL (.2) (5.7) (9.6)
FOREIGN 3.9 (1.2) (.8)
STATE (1.2) (.9) (1.3)
- - -------------------------------------
2.5 (7.8) (11.7)
- - -------------------------------------
$76.1 $32.9 $34.3
- - -------------------------------------
A reconciliation of the United States statutory rate to the effective income
tax rate follows:
1998 1997 1996
- - --------------------------------------------------------------
STATUTORY RATE 35.0% 35.0% 35.0%
EFFECT OF:
STATE TAXES, NET OF FEDERAL BENEFIT 3.0 2.3 3.0
R&D AND OTHER CREDITS (.9) (4.5)
TAX REFUND (1.7) (2.6) (.3)
NON-DEDUCTIBLE RESTRUCTURING CHARGE 4.1
EUROPEAN RESTRUCTURING (2.2)
DIVIDEND RECEIVED DEDUCTION (1.9) (7.4) (1.4)
UNCONSOLIDATED SUBSIDIARY FOR TAX PURPOSES 1.2
OTHER 1.7 1.2 1.1
- - --------------------------------------------------------------
EFFECTIVE RATE 34.2% 28.5% 37.0%
- - --------------------------------------------------------------
Domestic and foreign components of pre-tax income before extraordinary item are
as follows:
(IN MILLIONS) 1998 1997 1996
- - ------------------------------------
UNITED STATES $203.5 $114.0 $100.6
FOREIGN 19.1 1.3 (8.0)
- - ------------------------------------
$222.6 $115.3 $ 92.6
- - ------------------------------------
Deferred income taxes arise from differences in the timing of income, expense,
and tax credit recognition for financial reporting and income tax purposes.
Deferred income taxes are not provided on undistributed earnings of
international subsidiaries as the earnings are considered to be indefinitely
reinvested. At June 30, 1998, these undistributed earnings amounted to
approximately $35 million. Upon distribution of such earnings in the form of
dividends or otherwise, the Company
F-16
<PAGE>
would be subject to both U.S. income taxes and withholding taxes payable to the
various foreign countries. After taking into account available foreign tax
credits the amount of such taxes is immaterial.
The components of deferred tax balances are as follows:
JUNE 30
-----------------
(IN MILLIONS) 1998 1997
- - ---------------------------------------------------------------------------
PROVISION FOR ESTIMATED EXPENSES $ 78.8 $ 46.0
U.S. TAX CREDITS 9.6
STATE AND FOREIGN NET OPERATING LOSSES 25.0 13.5
ACCRUED RETIREE BENEFITS OTHER THAN PENSIONS 78.4 38.0
VACATION AND DEFERRED COMPENSATION ACCRUALS 33.6 10.3
OTHER 5.6 9.0
- - ---------------------------------------------------------------------------
GROSS DEFERRED TAX ASSETS 231.0 116.8
VALUATION ALLOWANCE (22.1) (13.1)
- - ---------------------------------------------------------------------------
TOTAL DEFERRED TAX ASSETS 208.9 103.7
LIFO INVENTORY (27.8)
RECOGNITION OF INCOME ON CONTRACTS REPORTED ON DIFFERENT
METHODS FOR
TAX PURPOSES THAN FOR FINANCIAL REPORTING (52.3) (52.1)
PROPERTY, PLANT & EQUIPMENT (93.2) (48.2)
PENSION BENEFITS (3.2) (12.9)
PATENTS AND TECHNOLOGY (20.2)
UNCONSOLIDATED SUBSIDIARY FOR TAX PURPOSES (4.6) (1.9)
OTHER (6.3) (3.3)
- - ---------------------------------------------------------------------------
TOTAL DEFERRED TAX LIABILITY (207.6) (118.4)
- - ---------------------------------------------------------------------------
NET DEFERRED TAX ASSET (LIABILITY) $ 1.3 $ (14.7)
- - ---------------------------------------------------------------------------
BALANCE SHEET CLASSIFICATION:
CURRENT ASSETS 43.6 $ 26.6
NONCURRENT LIABILITIES (42.3) (41.3)
- - ---------------------------------------------------------------------------
NET DEFERRED TAX ASSETS (LIABILITIES) 1.3 $ (14.7)
- - ---------------------------------------------------------------------------
The principal reason for changes in deferred tax balances is the inclusion of
the deferred taxes of Howmet in the 1998 consolidated balance sheet.
Alternative minimum tax credit carry-forwards of $3.9 million, available to
offset future Howmet U.S. Federal taxes, have no expiration date. At June 30,
1998, Howmet had foreign tax credit carry-forwards of $5.7 million, which it
expects to use in the future, and foreign tax benefits of $2.4 million which
will be realized over the next three years. At June 30, 1998, Howmet also had
$131 million of state net operating loss carry-forwards. Of this amount, $101
million expires on December 31, 1998 and $30 million expires on December 31,
1999. At June 30, 1998, the Company and Howmet combined had approximately $25.6
million of foreign net operating loss carry-forwards, which can only be used to
offset foreign taxable income. The majority of these carry-forwards have no
expiration date. Utilization by Howmet of alternative minimum tax credits,
state net operating loss carry-forwards, and $10.5 million of foreign net
operating loss carry-forwards will result in an adjustment to goodwill.
The valuation allowance at June 30, 1998 and 1997 is equal to the deferred tax
asset (net of liabilities) associated with all state and foreign net operating
loss carry-forwards. No other valuation allowances are provided because
management believes it is more likely than not that future operations will
generate sufficient taxable income to realize all other deferred tax assets.
F-17
<PAGE>
Total tax payments were $71.2, $31.9, and $55.8 million during 1998, 1997, and
1996, respectively.
During fiscal year 1996, the Internal Revenue Service (IRS) completed its audit
of federal income tax returns for fiscal years 1986 through 1993. Based upon
anticipated final results for the years under audit, interest accruals were
decreased in 1996 resulting in recognition of $27.5 million of interest income.
Also, as a result of substantial audit completion, $4.2 million of research and
other tax credits were recognized.
During fiscal year 1997, an anticipated tax refund in the amount of $3.2
million was received, along with $20.4 million in interest. Of those amounts,
$3 million was applied to reduce 1997 income tax expense. Approximately $8.7
million was recognized as interest income and the remaining $11.9 million was
used to increase liabilities for deferred taxes and related interest for future
tax payments.
During fiscal year 1998, an audit of a partnership in which the Company
participates was completed, resulting in a tax refund of $2.6 million, which
was applied to reduce 1998 income tax expense. In addition, $1.4 million of
interest received in connection with the refund was recognized as interest
income.
During fiscal year 1998, the IRS completed its audit of the Howmet Federal
income tax return for the year ended December 31, 1995, with no material
findings.
NOTE 9. STOCK SPLIT
On January 22, 1998, the Company's Board of Directors declared a two-for-one
stock split in the form of a stock dividend payable March 13, 1998, for each
stockholder of record on February 27, 1998. A regular quarterly dividend of
$.10 per common share, reflecting the split, was also declared payable March
13, 1998, for each stockholder of record on February 27, 1998. The stock split
affected stockholders' equity in the current year due to reclassifying the par
value amount of the common shares issued from retained earnings to common
stock. In addition, all references in the financial statements to number of
shares, per share amounts, stock option data, and market prices of the
Company's common stock have been restated.
NOTE 10. EARNINGS PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 128, "Earnings per Share." Statement 128 replaced the
previously reported "primary and fully diluted earnings per share" with "basic
and diluted earnings per share." Unlike primary earnings per share, basic
earnings per share excludes any dilutive effects of options, warrants, and
convertible securities. However, due to the limited dilutive impact, diluted
earnings per share approximates the Company's previously reported primary
earnings per share. All earnings per share amounts for all periods are
presented to conform to the Statement 128 requirements.
F-18
<PAGE>
The following table sets forth the computation of basic and diluted earnings
per share:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30
-----------------------
(IN MILLIONS, EXCEPT PER SHARE DATA) 1998 1997 1996
- - --------------------------------------------------------------------------------
<S> <C> <C> <C>
NUMERATOR
19 INCOME BEFORE MINORITY INTEREST AND EXTRAORDINARY ITEM $146.5 $ 82.4 $ 58.3
MINORITY INTEREST (20.5)
- - --------------------------------------------------------------------------------
NUMERATOR FOR BASIC AND DILUTED EARNINGS PER SHARE $126.0 $ 82.4 $ 58.3
- - --------------------------------------------------------------------------------
DENOMINATOR
DENOMINATOR FOR BASIC EARNINGS PER SHARE--WEIGHTED-
AVERAGE SHARES 36.6 36.5 36.4
EFFECT OF DILUTIVE SECURITIES:
EMPLOYEE STOCK OPTIONS 1.1 .9 .7
- - --------------------------------------------------------------------------------
DENOMINATOR FOR DILUTED EARNINGS PER SHARE--WEIGHTED-
AVERAGE SHARES AND ASSUMED CONVERSIONS 37.7 37.4 37.1
- - --------------------------------------------------------------------------------
INCOME PER SHARE BEFORE EXTRAORDINARY ITEM:
BASIC $ 3.45 $ 2.26 $ 1.60
DILUTED $ 3.34 $ 2.21 $ 1.57
- - --------------------------------------------------------------------------------
PER SHARE EFFECT OF EXTRAORDINARY ITEM:
BASIC $ (.19)
DILUTED $ (.19)
- - --------------------------------------------------------------------------------
</TABLE>
NOTE 11. EXTRAORDINARY ITEM
During December 1997, Howmet refinanced the majority of its debt to take
advantage of favorable interest rates and to reduce restrictive covenants. As a
result of the refinancing, Howmet incurred pre-tax charges of $20.2 million,
including a $6.5 million non-cash charge for the write-off of unamortized debt
issuance costs. The income tax benefit associated with the debt refinancing was
$8.5 million. The extraordinary charge shown on the Consolidated Statement of
Income has been reduced by $4.6 million related to minority interest. Howmet
repaid $146 million of debt at a 10 percent fixed interest rate and refinanced
$198 million of debt under a new revolving bank facility at a substantially
lower variable rate.
NOTE 12. RESTRUCTURING AND IMPAIRMENT
The Company's Propulsion and Fastening Systems' restructuring programs were
completed in the second quarter of fiscal year 1997. The restructuring
programs, initiated to reduce the Company's operating costs and improve
profitability, involved personnel reductions, closing of certain locations and
relocating operations in the United States and Europe. Charges included
severance, a goodwill write-off and fixed assets disposals. The Propulsion
System restructuring plan, announced in the third quarter of fiscal 1995,
included domestic pre-tax charges of $61.4 million. The Fastening System
restructuring plan announced in the second quarter of fiscal 1996 included
foreign pre-tax charges of $5.9 million. During the second quarter of 1997, the
restructuring was substantially completed and excess reserves from both
programs were closed and credited to income. The Propulsion and the Fastening
Systems segments recognized $1.4 million and $.8 million in income,
respectively. The restructuring plan included charges for certain issues that
have not yet been resolved, and the Company believes remaining reserves will be
adequate to cover future costs.
NOTE 13. PREFERRED STOCK PURCHASE RIGHTS
On May 22, 1997, the Board of Directors adopted a new stockholders' rights plan
and redeemed the existing stockholders' rights under the old plan. Under the
new plan, the Company declared a dividend distribution of one Preferred Share
Purchase Right for each outstanding common share. Each Right entitles its
holder to buy one one-hundredth of a share of a new series of the Company's
F-19
<PAGE>
preferred stock at an exercise price of $120. The Rights will only become
exercisable if a person or group acquires or makes an offer to acquire 15
percent or more of the Company's common stock. If any person or group acquires
15 percent or more of the Company's common stock, each Right will entitle the
holder (other than such acquirer) to purchase common stock of the Company
having a market value of twice the exercise price of the Right. If the Company
is acquired in a merger or other business combination, after a person has
acquired 15 percent or more of the Company's common stock, each Right will
entitle the holder to purchase common stock of the acquiring company having a
market value of twice the exercise price of the Right. The Rights may be
redeemed by the Company at the price of $.005 per Right prior to the
acquisition of 15 percent or more of the Company's common stock. The Rights
expire on May 22, 2007.
NOTE 14. RETIREMENT PLANS
The Company has noncontributory-defined benefit pension plans covering certain
employees. The determination of benefits for participating employees varies
among the covered groups. Generally, such benefits are based on a combination
of some of the following: earnings, average of the highest five consecutive
years' earnings during the 10 years preceding retirement, years of service,
age, investment income and specified amounts per years of service.
The Company's funding policy is to contribute amounts to the plans sufficient
to meet the minimum funding requirements of the Employee Retirement Income
Security Act of 1974, plus any additional amounts which the Company may
determine to be appropriate.
The annual cost for all Company-sponsored defined benefit pension plans,
includes the following components:
(IN MILLIONS) 1998 1997 1996
- - --------------------------------------------------------
SERVICE COST $ 23.5 $ 12.7 $ 12.7
INTEREST COST 51.8 41.0 37.5
ACTUAL GAIN ON PLAN ASSETS (182.0) (59.1) (115.0)
NET AMORTIZATION AND DEFERRAL 117.9 8.1 66.9
- - --------------------------------------------------------
NET PENSION COST $ 11.2 $ 2.7 $ 2.1
- - --------------------------------------------------------
Reconciliation of the funded status of all defined benefit pension plans at
June 30 is as follows:
<TABLE>
<CAPTION>
1998 1997
---------------------------- ----------------------------
ACTUARIAL BENEFIT OBLIGATION ACTUARIAL BENEFIT OBLIGATION
---------------------------- ----------------------------
EXCEED LESS THAN EXCEED LESS THAN
(IN MILLIONS) PLAN ASSETS PLAN ASSETS PLAN ASSETS PLAN ASSETS
- - --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ACTUARIAL PRESENT
VALUE OF BENEFITS:
VESTED BENEFITS $ 37.4 $ 615.7 $ 18.6 $ 489.3
NON VESTED BENEFITS 4.7 10.2 2.2 5.5
- - --------------------------------------------------------------------------------------
ACCUMULATED BENEFIT
OBLIGATION 42.1 625.9 20.8 494.8
EFFECT OF PROJECTED
FUTURE COMPENSATION
INCREASES 9.2 95.2 3.2 79.6
- - --------------------------------------------------------------------------------------
PROJECTED BENEFIT
OBLIGATION 51.3 721.1 24.0 574.4
FAIR VALUE OF PLAN
ASSETS 21.5 872.0 5.5 617.2
- - --------------------------------------------------------------------------------------
PLAN ASSETS (LESS
THAN) IN EXCESS OF
PROJECTED BENEFIT
OBLIGATION (29.8) 150.9 (18.5) 42.8
UNRECOGNIZED NET
LOSSES (GAINS) 17.3 (40.2) 11.3 36.4
UNRECOGNIZED
TRANSITION BENEFIT
(OBLIGATION) .2 (13.9) (.2) (17.2)
UNRECOGNIZED PRIOR
SERVICE (REDUCTION)
COST (38.0) 9.3 (.2) 9.5
- - --------------------------------------------------------------------------------------
PENSION (DEFICIT)
ASSET $ (50.3) $ 106.1 $ (7.6) $ 71.5
- - --------------------------------------------------------------------------------------
</TABLE>
F-20
<PAGE>
The accumulated benefit obligation and the corresponding unrecognized net loss
and prior service cost increased in 1998 principally due to the addition of
Howmet's plans and changing the discount rate assumption for Cordant's plans.
The unrecognized net asset and the unrecognized prior service cost are being
amortized based on the projected service lives of employees, which range from
15-25 years. Additional assumptions used in determining net pension cost for
all defined benefit pension plans except Howmet's were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
- - --------------------------------------------------------------
<S> <C> <C> <C>
DISCOUNT RATE 7.0% 7.5% 7.5%
RATE OF INCREASE IN COMPENSATION LEVELS 4.75% 4.75% 4.75%
EXPECTED LONG-TERM RATE OF RETURN ON ASSETS 9.0% 9.0% 9.0%
- - --------------------------------------------------------------
</TABLE>
The assumptions used by Howmet for 1998 for their plans include a discount rate
of 7.5 percent, expected rate of return of 9 percent, and an expected increase
in future salaries of 5 percent.
Assets of the Company-sponsored plans are invested primarily in equities and
bonds. Certain pension plans contain restrictions on using excess pension plan
assets in the event of a change in control of the Company.
Generally pension costs charged to and recovered through government contracts
approximate amounts contributed to pension plans. Pension costs for financial
statement purposes are calculated in conformity with SFAS No. 87, "Employers'
Accounting for Pensions." Historically, the annual amount of pension cost
recovered through government contracts and included in sales has exceeded the
amount of pension cost included in the financial statements. As a result, the
Company has deferred $55.8 million and $47.2 million of revenues as of June 30,
1998 and 1997, respectively to provide a better matching of revenues and
expenses. This revenue will be recognized when the financial statement pension
cost exceeds amounts charged to contract pension cost. The $55.8 million of
deferred revenue is netted against the pension asset in "Other noncurrent
assets" in the balance sheet. Accrued pension cost is included in "Other
accrued expenses" and "Accrued interest and other noncurrent liabilities" in
the balance sheet.
The Company sponsors certain supplemental plan arrangements to provide
retirement benefits to specified groups of participants. Contributions are
included in an Internal Revenue Code (IRC) qualified restricted trust which is
subject to the Company's creditors.
The Company has matching and nonmatching 401(k) savings plans for eligible
employees. The Company matches nonunion employee contributions, depending on
the plan, at rates varying between 50 to 100 percent with limits ranging
between 5 to 8 percent of employee earnings. Howmet matches union employee
contributions 100 percent up to $50 per month. Company contributions to the
matching savings plans were $8.6, $6 and $6.4 million in 1998, 1997 and 1996
respectively, which are based on a limited percentage of participant
contributions.
NOTE 15. POST-RETIREMENT BENEFITS OTHER THAN PENSIONS
The Company provides certain nonvested health care and life insurance benefits
for substantially all of its retirees and eligible dependents. The plan, which
is separate from plans covering Howmet employees, is contributory, with retiree
contribution levels adjusted annually, and contains other cost-sharing features
including deductibles and coinsurance. The Company's cost for retiree medical
is limited to a 4 percent annual increase for employees retiring after February
1, 1993. Current eligibility requirements include 10 years of credited service
after attaining age 45.
The Company's policy is to fund the cost of retiree medical benefits at
management's discretion or as amounts are expended. Voluntary Employees'
Beneficiary Association trusts and other trusts under IRC regulations were
established in 1994 for government contract reimbursement purposes. The amounts
funded are tax deductible in the year of contribution.
F-21
<PAGE>
Howmet provides postretirement health care and life insurance benefits to its
eligible active and retired employees, including certain union, nonunion and
salaried employees. Benefits are funded as amounts are expended.
The annual retiree medical and life insurance costs include the following
components:
(IN MILLIONS) 1998 1997 1996
- - ---------------------------------------------------------------------------
SERVICE COST--ATTRIBUTED TO SERVICE DURING THE PERIOD $ 6.9 $ 2.6 $ 2.2
INTEREST COST ON ACCUMULATED POST-RETIREMENT BENEFIT
OBLIGATION 17.4 8.2 8.0
RETURN ON ASSETS (3.8) (1.3) (1.8)
NET AMORTIZATION AND DEFERRAL 6.1 1.5 1.9
- - ---------------------------------------------------------------------------
RETIREE MEDICAL AND LIFE INSURANCE COSTS $26.6 $11.0 $10.3
- - ---------------------------------------------------------------------------
The following table reconciles the plan's funded status to the amount included
in the Company's balance sheet at June 30:
(IN MILLIONS) 1998 1997
- - ------------------------------------------------------------------------------
ACCUMULATED POST-RETIREMENT BENEFIT OBLIGATION:
RETIREES $158.1 $106.0
FULLY ELIGIBLE ACTIVE PLAN PARTICIPANTS 29.1 10.7
OTHER ACTIVE PLAN PARTICIPANTS 59.7 19.8
- - ------------------------------------------------------------------------------
TOTAL ACCUMULATED POST-RETIREMENT BENEFIT OBLIGATION 246.9 136.5
PLAN ASSETS AT FAIR VALUE, PRIMARILY LISTED STOCKS ANDA BONDS (26.1) (19.2)
- - ------------------------------------------------------------------------------
ACCUMULATED POST-RETIREMENT BENEFIT OBLIGATION IN EXCESS OF
PLAN ASSETS 220.8 117.3
UNRECOGNIZED PRIOR SERVICE COST (4.5)
UNRECOGNIZED NET EXPERIENCE LOSS (43.2) (46.9)
- - ------------------------------------------------------------------------------
TOTAL 173.1
LESS CURRENT PORTION 6.2
- - ------------------------------------------------------------------------------
ACCRUED RETIREE BENEFITS OTHER THAN PENSIONS $166.9 $ 70.4
- - ------------------------------------------------------------------------------
Additional assumptions to measure the accumulated post-retirement obligation
and cost for all plans except Howmet's were as follows:
1998 1997 1996
- - -----------------------------------------------------------------------------
DISCOUNT RATE 7.0% 7.5% 7.5%
BEFORE AGE 65 HEALTH CARE COST TREND RATE DECREASING TO 6%
BY 2001 10.0% 11.0% 12.0%
AFTER AGE 65 HEALTH CARE COST TREND RATE 6.0% 7.0% 8.0%
EXPECTED LONG-TERM RATE OF RETURN ON ASSETS 8.0% 8.0% 8.0%
- - -----------------------------------------------------------------------------
The health care cost trend rate to be used in fiscal year 1999 for before-age-
65 benefits is 9 percent, while the after-age-65 benefits rate will stay at 6
percent.
The assumptions used by Howmet for their plans include a discount rate of 7.5
percent, and a health care cost-trend-rate for below-age-65 benefits of 10
percent, declining 1 percent annually to 6 percent in the year 2001. The health
care cost-trend-rate for after-age-65 benefits was 8.2 percent, declining
gradually to 5 percent in the year 2001.
Increasing the assumed health care cost-trend-rate by one percentage point
would increase the accumulated post-retirement benefit obligation for the
Company at June 30, 1998 and 1997, by approximately $14.9 and $6.8 million,
respectively, and increase retiree medical costs by approximately $1.5 million
each year.
F-22
<PAGE>
NOTE 16. CONTINGENT MATTERS
Thiokol Corporation v. The United States of America. In 1996, the Company filed
an action in the United States Court of Federal Claims seeking payment of costs
that arose under its cost reimbursement contracts with the Government for
operation and management of Government-owned, contractor-operated Army
ammunition plants in Texas and Louisiana. The Company sought to recover its
costs of Government-approved benefits that workers earned during their years of
service at these plants. These benefits include: (i) post-retirement health
benefits; (ii) long-term disability benefits; (iii) workers' compensation
benefits; and (iv) severance benefits. On December 30, 1997, this case was
settled out of court. The Government has agreed to forego its claim to certain
surplus pension assets. The Company has agreed to apply the dollar equivalent
of a portion of future pension contributions to the payment of the benefits
that were the subject of the lawsuit. The Company expects these transactions
will not be material and has agreed to fund any additional costs related to the
benefits.
The Company is also currently involved in a number of lawsuits and other
contingencies that are not expected individually or in the aggregate to have a
material adverse effect upon the Company's financial condition. However,
depending on the amount and timing of an unfavorable resolution of these
contingencies, it is possible that the Company's future results of operations
or cash flows could be materially affected in a particular period.
NOTE 17. ENVIRONMENTAL MATTERS
The Company's Thiokol Propulsion division is involved with two Environmental
Protection Agency (EPA) superfund sites in Morris County, New Jersey, formerly
operated by the Company for government contract work. The Company has not
incurred any significant costs relating to these environmental sites. The
Company has signed a consent decree with the EPA on the Rockaway Borough Well
Field site and with the state of New Jersey on the Rockaway Township Well Field
site. The Company has recorded a $9.4 million liability for response costs,
site remediation, and future operation and maintenance costs on both sites. In
addition to the above sites, the Company is involved with other locations
involving environmental issues.
The Company's Propulsion and Fastening Systems segments' estimated liability
for all environmental remediation is $21 million, and is classified in "other
accrued expenses" and "accrued interest and other noncurrent liabilities." The
Company believes that any liability exceeding amounts recorded will not have a
material adverse effect on the Company's future results of operations or
financial position. The Company has collected approximately $9.5 million in
environmental-related recoveries from insurance companies through fiscal year
June 30, 1998. The Company expects to recover from the government additional
amounts as expenses are incurred. The Company estimates it will spend
approximately $3.5 and $2.6 million of the total liability, respectively, over
the next two years.
In connection with the Howmet acquisition, Pechiney, S.A. (Howmet's previous
owner) indemnified Howmet for environmental liabilities relating to Howmet and
stemming from events occurring or conditions existing on or prior to the
acquisition, to the extent that such liabilities exceed a cumulative $6
million. It is highly probable that changes in any of the following accrued
liabilities will result in an equal change in the amount receivable from
Pechiney, S.A. pursuant to this indemnification. The Company believes that any
Howmet liability exceeding amounts recorded will not have a material adverse
effect on the Company's future results of operations or financial position.
Howmet has received test results indicating levels of polychlorinated biphenyls
("PCBs") at its Dover, N.J., plant that will require remediation. Various
remedies are possible and could involve expenditures ranging from $2 million to
$22 million or more. Howmet has recorded a $2 million long-term liability for
this plant. Besides the above-mentioned remediation work required at the
Company's Dover, N.J., plant, liabilities exist for clean-up costs associated
with hazardous types of materials at eight other on-site and off-site waste
disposal facilities. Howmet has been, or may be, named a potentially
responsible party under the Comprehensive Environmental Response, Compensation
and Liability Act, or similar state laws at these locations. At June 30, 1998,
$4.1 million of accrued environmental liabilities are included in the
consolidated balance sheet for these eight sites. The indemnification discussed
above applies to the costs associated with the Dover, N.J., plant and the eight
other locations.
F-23
<PAGE>
In addition to the above environmental matters, and unrelated to Howmet
operations, Howmet and Pechiney, S.A. are jointly and severally liable for
environmental contamination and related costs associated with certain
discontinued mining operations owned and/or operated by a predecessor-in-
interest until the early 1960s. These liabilities include approximately $21.3
million in remediation and natural resource damage liabilities at the Blackbird
Mine site in Idaho and a minimum of $10 million in investigation and
remediation costs at the Holden Mine site in Washington. Pechiney, S.A. has
agreed to indemnify Howmet for such liabilities. In connection with these
environmental matters, Howmet has recorded a $31.3 million liability which is
classified in "Accrued interest and other noncurrent liabilities," and an equal
$31.3 million receivable from Pechiney, S.A., which is classified in "Other
noncurrent assets." Pechiney, S.A. is currently funding all amounts related to
these liabilities.
NOTE 18. LEASE COMMITMENTS
The Company has operating leases that are principally short-term and primarily
for building and office space and other real estate. Rental expense charged was
$19.6, $14.5, and $10.9 million in 1998, 1997, and 1996, respectively. Renewal
and purchase options are available on certain of these leases. Future minimum
rental commitments under non-cancelable operating leases total approximately
$45 million with $14.3, $11.8, $6.9 and $2.9 million committed in 1999 through
2002 respectively, and $9.2 million thereafter. Certain plant facilities and
equipment are provided for use by the government under short-term or cancelable
arrangements.
NOTE 19. STOCK OPTION AND PERFORMANCE UNIT PLANS
The Company's Stock Option Plans provide that grants of stock options, shares
of restricted stock, and other awards may be made to key Company employees and
its affiliates in which the Company has a direct or indirect equity interest.
Stock option activity is summarized as follows:
WEIGHTED AVERAGE
SHARES PER SHARE
- - -----------------------------------------------------------------------------
OPTIONS OUTSTANDING AT JUNE 30, 1995, (1,142,142
EXERCISABLE SHARES) 1,481,142 $ 9.75
GRANTED 867,600 $17.79
LAPSED (50,350) $13.30
EXERCISED (209,804) $ 9.89
- - -----------------------------------------------------------------------------
OPTIONS OUTSTANDING AT JUNE 30, 1996, (1,250,788
EXERCISABLE SHARES) 2,088,588 $12.99
GRANTED 396,048 $19.75
LAPSED (10,800) $17.98
EXERCISED (258,594) $11.60
- - -----------------------------------------------------------------------------
OPTIONS OUTSTANDING AT JUNE 30, 1997, (1,384,042
EXERCISABLE SHARES) 2,215,242 $14.34
GRANTED 219,392 $40.20
LAPSED (75,800) $19.14
EXERCISED (316,338) $14.47
- - -----------------------------------------------------------------------------
OPTIONS OUTSTANDING AT JUNE 30, 1998, (1,456,496
EXERCISABLE SHARES) 2,042,496 $16.91
- - -----------------------------------------------------------------------------
Options outstanding at June 30, 1998, have expiration dates ranging from July
1999 to October 2007.
Limited appreciation rights were outstanding covering 143,450 option shares.
Limited appreciation rights are paid automatically in cash in lieu of other
related options upon a change in control of the Company.
During fiscal year 1996, options for 460,000 shares of Cordants common stock
were contingently granted to certain Howmet employees. Such options were
granted at $17.75 per share (380,000) and $20.47 per share (80,000), the market
prices on the dates of grant. At June 30, 1998, 390,000 shares of contingent
options were outstanding. These options vest if Cordant acquires 100% of
Howmet. Subsequent to the initial grant of those options, the participants were
granted rights under an alternative plan whereby if Cordant
F-24
<PAGE>
does not acquire 100% of Howmet by December 31, 2001, each participant will
vest in a dollar amount equal to the difference between the aggregate market
value of all of the shares of Cordant common stock represented by the
participants' stock option and the aggregate exercise price of all such
options. Whether the executives vest in the Cordant options or vest in the
alternative plan, the Company will record compensation expense for one but not
both plans. Since vesting is assured under the alternative plan, Howmet is
recording compensation expense related to that plan over the six-year vesting
period ending December 13, 2001. In fiscal 1998, $4.6 million of compensation
expense was charged against income.
Shares of common stock reserved for both outstanding and future grants of
options and other stock-based awards at June 30, 1998 and 1997 were 3,798,342
and 4,114,680 shares, respectively.
On July 1, 1996, the Company adopted SFAS No. 123 "Accounting for Stock-Based
Compensation." In accordance with the provisions of SFAS No. 123, the Company
has chosen to continue to account for stock-based compensation using the
intrinsic value method under APB Opinion No. 25 and, accordingly, does not
recognize compensation cost. If the Company recognized compensation cost based
on the fair value of the options granted at grant date, as prescribed by SFAS
No. 123, net income and earnings per share on a pro forma basis would have been
reduced approximately 2 percent in both 1998 and 1997.
Information regarding stock options outstanding and exercisable as of June 30,
1998, is as follows:
PRICE RANGE
---------------------------------------
$5.84 $13.06 $19.31 $36.13
TO $12.22 TO $17.75 TO $27.84 TO $45.59
- - -------------------------------------------------------------------------------
OPTIONS OUTSTANDING:
NUMBER 678,868 803,133 362,095 198,400
WEIGHTED AVERAGE EXERCISE PRICE $9.12 $16.39 $19.92 $40.16
WEIGHTED AVERAGE REMAINING CONTRACTUAL
LIFE 4.4 YEARS 6.8 YEARS 8.1 YEARS 9.1 YEARS
OPTIONS EXERCISABLE:
NUMBER 678,868 453,133 322,095 2,400
WEIGHTED AVERAGE EXERCISE PRICE $9.11 $15.34 $19.85 $36.13
- - -------------------------------------------------------------------------------
Certain Howmet employees have options to purchase a collective total of
4,410,500 of Howmet common stock. Virtually all of these options were granted
in December 1997 with an exercise price of $15, the market price at that time.
Such options will vest and become exercisable in 25 percent increments on
January 1 of each year beginning in 1999. The options expire eight years after
the date of grant. Most of this group of Howmet employees participate in a
Stock Appreciation Rights (SARs) plan. The maximum per share value of the
outstanding SARs is limited to the difference between $15 and the SARs' base
price per share (generally $2). Howmet recorded approximately $20.7, $21.6 and
$.9 million of expense related to the plan for the years ending June 30, 1998,
1997 and 1996 respectively.
NOTE 20. FAIR VALUE OF FINANCIAL INSTRUMENTS
Under SFAS No. 107, "Fair Value Disclosures about Financial Instruments," the
Company is required to disclose the fair value of financial instruments,
including off-balance-sheet financial instruments, when fair value can be
reasonably estimated. The following methods and assumptions were used in
estimating fair values:
Cash and cash equivalents: The carrying amount approximates fair value.
RECEIVABLES: The fair value of receivables, due to the collection of certain
receivables over an extended period, is based on the discounted value of
expected future cash flows. The carrying amount approximates fair value.
F-25
<PAGE>
SHORT-TERM AND LONG-TERM DEBT: The carrying value of short-term debt
approximates fair value. The fair value of long-term debt is estimated based on
the current borrowing rates for similar issues and also approximates the
carrying amount.
OFF-BALANCE-SHEET INSTRUMENTS: The Company enters into forward exchange
contracts as a hedge against currency fluctuations of certain foreign currency
transactions. At June 30, 1998, the Company had contracts to buy various
currencies with maturity dates ranging from July 1998 through January 1999. The
total contract value of these transactions in U.S. dollars was $31.8 million,
which approximates fair value. The fair value of these contracts was estimated
based on June 30, 1998 foreign exchange rates obtained from dealers. Gains or
losses arising from foreign exchange contracts offset foreign exchange gains or
losses on underlying hedged commitments. The impact on the financial position
and results of operations from likely changes in foreign exchange rates is
mitigated by minimizing risk through hedging transactions related to
commitments.
The Company enters into forward exchange contracts with major dealers and does
not require collateral. If a counterparty was not able to completely fulfill
its contract obligations, the Company would incur a loss equal to the amount of
any gain on the contract.
NOTE 21. OPERATIONS BY INDUSTRY SEGMENT
The Company and its subsidiaries design, develop, manufacture, and sell
products classified in three industry segments.
The Propulsion Systems segment consists of solid rocket propulsion for NASA,
the Department of Defense, and various commercial customers for space
applications, as well as, gas generator and ordnance products, metal and
composite components, and services relating to such systems.
The Fastening Systems segment consists of specialty fastening systems for a
broad range of aerospace and industrial applications worldwide.
The Investment Castings segment provides products worldwide for both the
aerospace and industrial gas turbine (IGT) markets.
F-26
<PAGE>
The following table summarizes segment information:
<TABLE>
<CAPTION>
(IN MILLIONS) 1998 1997 1996
- - -----------------------------------------------------------------------------
<S> <C> <C> <C>
NET SALES
PROPULSION SYSTEMS $ 655.9 $606.1 $651.1
FASTENING SYSTEMS 354.1 284.0 238.4
INVESTMENT CASTINGS/(3)/ 769.3
- - -----------------------------------------------------------------------------
CONSOLIDATED NET SALES $1,779.3 $890.1 $889.5
- - -----------------------------------------------------------------------------
SEGMENT OPERATING PROFIT (LOSS)
PROPULSION SYSTEMS/(1)/ $ 78.8 $ 55.1 $ 77.1
FASTENING SYSTEMS/(2)/ 51.4 27.0 (6.3)
INVESTMENT CASTINGS/(3)/ 104.4
- - -----------------------------------------------------------------------------
SEGMENT OPERATING PROFIT 234.6 82.1 70.8
EQUITY INCOME 15.6 30.5 4.5
INTEREST INCOME 10.0 10.9 30.2
INTEREST EXPENSE (16.2) (1.7) (3.9)
UNALLOCATED CORPORATE EXPENSE (18.7) (6.5) (9.0)
OTHER, NET (2.7)
- - -----------------------------------------------------------------------------
CONSOLIDATED INCOME BEFORE INCOME TAXES, MINORITY
INTEREST, AND EXTRAORDINARY ITEM $ 222.6 $115.3 $ 92.6
- - -----------------------------------------------------------------------------
TOTAL ASSETS
PROPULSION SYSTEMS $ 316.0 $350.2 $384.6
FASTENING SYSTEMS 517.2 247.5 242.7
INVESTMENT CASTINGS/(3)//(4)/ 1,149.6
CORPORATE 68.6 256.7 191.0
- - -----------------------------------------------------------------------------
CONSOLIDATED ASSETS $2,051.4 $854.4 $818.3
- - -----------------------------------------------------------------------------
DEPRECIATION AND AMORTIZATION EXPENSE
PROPULSION SYSTEMS 25.2 27.7 28.9
FASTENING SYSTEMS 11.9 11.9 12.3
INVESTMENT CASTINGS/(3)/ 37.9
CORPORATE .6 .6 .8
- - -----------------------------------------------------------------------------
CONSOLIDATED DEPRECIATION AND AMORTIZATION EXPENSE $ 75.6 $ 40.2 $ 42.0
- - -----------------------------------------------------------------------------
CAPITAL EXPENDITURES
PROPULSION SYSTEMS 10.6 10.4 17.2
FASTENING SYSTEMS 7.8 15.1 11.2
INVESTMENT CASTINGS/(3)/ 50.9
CORPORATE 3.5 7.6 .7
- - -----------------------------------------------------------------------------
CONSOLIDATED CAPITAL EXPENDITURES $ 72.8 $ 33.1 $ 29.1
- - -----------------------------------------------------------------------------
</TABLE>
/(1)/Propulsion systems income in 1997 included a $1.3 million restructuring
reserve release.
/(2)/Fastening systems income in 1997 included a $.9 million restructuring
reserve release, and 1996 included a $5.9 million restructuring charge and
$12.2 million of inventory charges.
/(3)/Consolidation of Investment castings began in December 1997.
/(4)/Excludes $726.9 million related to Restricted Trust (See Note 6).
A proportionate share of Corporate general and administrative expense is
allocated and reimbursed through propulsion systems contracts. Intersegment
sales are not significant.
Corporate assets consist principally of cash and cash equivalents; income tax
receivable; property, plant, and equipment; and other noncurrent assets.
F-27
<PAGE>
Net sales under government contracts and subcontracts amounted to $656.9,
$543.7, and $618.4 million for 1998, 1997, and 1996, respectively. The sales as
a percentage of consolidated net sales were 37, 61, and 70 percent for 1998,
1997, and 1996, respectively. No other customer had sales greater than 10
percent of the consolidated total.
NOTE 22. GEOGRAPHIC INFORMATION
The Company is a multinational entity with operating subsidiaries in three
geographic regions: North America (including the United States and Canada),
Europe (including France and the United Kingdom) and the Pacific Rim (including
Japan, Taiwan, and Australia). Intercompany transfers between geographic areas
are not significant. In computing earnings from operations for subsidiaries
outside of the United States, no allocations of general corporate expenses have
been made. Allocated identifiable assets exclude the $726.9 million Restricted
Trust (See Note 6. Restricted Trust and Related Pechiney Notes Payable).
YEAR ENDED JUNE 30
(IN MILLIONS) 1998 1997 1996
- - ------------------------------------------------------
NET SALES
NORTH AMERICA $1,556.4 $821.3 $827.6
EUROPE 203.6 48.1 43.1
ASIA 19.3 20.7 18.8
- - ------------------------------------------------------
CONSOLIDATED NET SALES $1,779.3 $890.1 $889.5
- - ------------------------------------------------------
OPERATING PROFIT (LOSS)
NORTH AMERICA $ 197.6 $ 72.8 $ 69.9
EUROPE 18.2 2.2 (8.7)
ASIA .1 .6 .6
- - ------------------------------------------------------
CONSOLIDATED OPERATING PROFIT $ 215.9 $ 75.6 $ 61.8
- - ------------------------------------------------------
TOTAL ASSETS
NORTH AMERICA $1,770.0 $807.8 $767.2
EUROPE 269.6 32.7 38.3
ASIA 11.8 13.9 12.8
- - ------------------------------------------------------
CONSOLIDATED ASSETS $2,051.4 $854.4 $818.3
- - ------------------------------------------------------
Sales to unaffiliated customers include export sales of $254 million for 1998.
Export sales of domestic operations, included in total export sales, were
$198.2 million. In 1998, approximately 54% of export sales of domestic
operations were to Western Europe, approximately 22% were to Canada and
approximately 21% were to the Far East. Export sales in 1997 and 1996 were
$22.3 and $10.4 million, respectively.
F-28
<PAGE>
NOTE 23. QUARTERLY FINANCIAL HIGHLIGHTS (UNAUDITED)
FISCAL YEAR 1998
THREE MONTHS ENDED
---------------------------------
(IN MILLIONS, EXCEPT PER SHARE DATA) JUNE 30 MARCH 31 DEC. 31 SEPT. 30
- - -----------------------------------------------------------------------------
NET SALES $628.6 $562.7 $350.3 $237.7
GROSS PROFIT 147.8 136.0 79.3 48.3
INCOME BEFORE EXTRAORDINARY ITEM(/1/) 41.1 32.8 23.5 28.6
NET INCOME(/1/) 41.1 32.8 16.4 28.6
INCOME PER SHARE BEFORE EXTRAORDINARY ITEM 1.09 .87 .62 .76
NET INCOME PER SHARE(/1/) 1.09 .87 .43 .76
CASH DIVIDENDS PAID PER SHARE(/3/) .10 .10 .10 .10
MARKET PRICE(/3/)
HIGH 55.75 50.13 47.25 44.13
LOW 44.50 39.53 39.88 33.88
- - -----------------------------------------------------------------------------
FISCAL YEAR 1997
THREE MONTHS ENDED
---------------------------------
(IN MILLIONS, EXCEPT PER SHARE DATA) JUNE 30 MARCH 31 DEC. 31 SEPT. 30
- - -----------------------------------------------------------------------
NET SALES $255.6 $226.5 $210.0 $198.0
GROSS PROFIT 45.5 42.2 44.4 34.3
NET INCOME/(2)/ 23.7 20.8 18.7 19.2
NET INCOME PER SHARE/(2)/ 1.26 1.12 1.00 1.03
CASH DIVIDENDS PAID PER SHARE/(3)/ .10 .085 .085 .085
MARKET PRICE/(3)/
HIGH 38.13 30.44 23.69 23.44
LOW 27.44 22.25 20.63 17.32
- - -----------------------------------------------------------------------
/(1)/The second quarter of 1998 included an extraordinary loss for Howmet debt
refinancing of $7.1 million or $.19 per share. The third quarter in 1998
included the recognition of interest income related to income tax refunds
of $1.4 million and a $2.6 million tax credit ($3.5 million after tax or
$.09 per share).
/(2)/The first quarter of 1997 included the recognition of interest income
related to income taxes of $7 million and a $3 million tax credit ($7.3
million or $.39 per share after-tax). The third and fourth quarters of 1997
included recognition of interest income related to income tax refunds of
$.8 million and $.9 million ($.5 million and $.6 million or $.03 per share
after tax each quarter), respectively.
/(3)/All per share data has been adjusted for the 2 for 1 stock split that was
paid on March 13, 1998.
F-29
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS FISCAL YEAR 1998 COMPARED TO FISCAL YEAR 1997
On May 5, 1998, Thiokol Corporation announced effective immediately the change
of its corporate name to Cordant Technologies Inc. (the Company or Cordant).
The Company's three business segments will retain their present names (Thiokol
Propulsion, Huck International, Inc., and Howmet International Inc.) and are
referred to as a part of Cordant Technologies.
The Company increased its ownership in Howmet from 49 percent to 62 percent on
December 2, 1997. Accordingly, beginning in December, Howmet's earnings, cash
flows, and its balance sheet have been consolidated with the Company's. As a
result, the twelve months of operating results for the current year include
five months of Howmet earnings reported under the equity method and seven
months of Howmet earnings on a consolidated basis. Minority interest in income
and equity is also reported for the 38 percent of Howmet the Company does not
own. Due to the consolidation of Howmet in the Company's financial statements,
comparison of financial information for the respective periods is difficult and
may not be relevant. In order to facilitate an understanding of the Company's
data, separate Howmet comparative data and analysis have been included below
for the respective periods being reported. On June 11, 1998, the Company
acquired Jacobson Manufacturing Company Inc. for $273.6 million. Operating
income for Jacobson from June 11 through June 30 was approximately $1 million
and is included in the consolidated results of the Company within the fastening
systems segment.
The Company has adopted FASB statement 128 "Earnings per Share," discussed in
the notes to the financial statements above. All of the following discussion
reflects diluted earnings per share, which approximates the primary earnings
per share method previously reported by the Company. All earnings per share
amounts, number of shares, stock option data and market prices of the Company's
common stock have been restated and adjusted for the two-for-one stock dividend
on March 13, 1998.
RESULTS OF OPERATIONS
Income before extraordinary item for the fiscal year ended June 30, 1998 was
$126 million or $3.34 per share, an increase of 53 percent compared to $82.4
million or $2.21 per share last year. Net income for fiscal year ended June 30,
1998 was $118.9 million, or $3.15 per share. The current year included an
extraordinary charge of $7.1 million or $.19 per share, net of income taxes and
minority interest, related to the Howmet debt refinancing to take advantage of
favorable interest rates. Net income for fiscal 1998 also included tax interest
income and tax refunds of $3.5 million or $.09 per share. Net income for fiscal
1997 included income tax refunds and interest on the refunds and restructuring
credits totaling $9.7 million or $.52 per share.
F-30
<PAGE>
SUMMARY UNAUDITED FINANCIAL INFORMATION FOR THE 12 MONTHS ENDED JUNE 30, 1998
FOLLOWS:
DOLLAR PERCENT
(IN MILLIONS EXCEPT PER SHARE DATA) 1998 1997 CHANGE CHANGE
- - ----------------------------------------------------------------------------
SALES
PROPULSION SYSTEMS $ 655.9 $606.1 $ 49.8 8
FASTENING SYSTEMS 354.1 284.0 70.1 25
INVESTMENT CASTINGS 769.3 769.3
- - ----------------------------------------------------------------------------
TOTAL SALES $1,779.3 $890.1 $889.2 100
- - ----------------------------------------------------------------------------
OPERATING INCOME
PROPULSION SYSTEMS $ 78.8 $ 55.1 $ 23.7 43
FASTENING SYSTEMS 51.4 27.0 24.4 90
INVESTMENT CASTINGS 104.4 104.4
UNALLOCATED CORPORATE EXPENSE (18.7) (6.5) (12.2) (188)
- - ----------------------------------------------------------------------------
TOTAL OPERATING INCOME 215.9 75.6 140.3 186
EQUITY INCOME OF AFFILIATES 15.6 30.5 (14.9) (49)
INTEREST INCOME 10.0 10.9 (.9) (8)
INTEREST EXPENSE (16.2) (1.7) (14.5) (853)
OTHER, NET (2.7) (2.7)
INCOME TAXES (76.1) (32.9) (43.2) (131)
- - ----------------------------------------------------------------------------
INCOME BEFORE MINORITY INTEREST AND EX-
TRAORDINARY ITEM 146.5 82.4 64.1 78
MINORITY INTEREST (20.5) (20.5)
- - ----------------------------------------------------------------------------
INCOME BEFORE EXTRAORDINARY ITEM 126.0 82.4 43.6 53
EXTRAORDINARY ITEM--LOSS ON EARLY RETIRE-
MENT OF DEBT (7.1) (7.1)
- - ----------------------------------------------------------------------------
NET INCOME $ 118.9 $ 82.4 $ 36.5 44
- - ----------------------------------------------------------------------------
PER DILUTED SHARE:
INCOME BEFORE EXTRAORDINARY ITEM: $ 3.34 $ 2.21 $ 1.13 51
NET INCOME: $ 3.15 $ 2.21 $ .94 43
- - ----------------------------------------------------------------------------
BUSINESS SEGMENT SALES AND INCOME FOR THE YEAR
PROPULSION SYSTEMS
Propulsion systems sales increased 8 percent compared to last year. The higher
sales were due to advanced materials purchased, which increases sales for the
Space Shuttle Reusable Solid Rocket Motor (RSRM) Buy III and Buy IV programs,
increased commercial launch motor revenues, and higher Missile Defense program
activity.
Thiokol Propulsion systems operating income increased 43 percent from the prior
year. The higher income was due to increased sales, higher margins in the
commercial launch motor program, and reduced corporate overhead allocations due
to the allocation of overhead to Howmet starting in December 1997 when it
became a consolidated subsidiary.
FASTENING SYSTEMS
Fastening systems sales and operating income increased 25 and 90 percent,
respectively, over the prior year, reflecting continued strength in both
commercial aircraft and industrial markets. This was the second consecutive
year of record sales and income for fastening systems. Commercial aerospace
sales were up $49.2 million, while industrial sales increased $20.9 million
over fiscal 1997. Operating income, which increased $24.4 million over the
prior year, benefited from the higher sales as well as
F-31
<PAGE>
continuing cost control initiatives and more efficient manufacturing practices.
The improved operating efficiency was reflected in operating margins, which
were higher in each successive quarter in fiscal year 1998. For the year,
margins were 14.5 percent compared to 9.5 percent in the prior year.
Fastening Systems book-to-bill ratios, which are orders divided by shipments,
for the twelve months ended June 30, were as follows:
1998 1997
- - ---------------------
AEROSPACE 1.09 1.32
INDUSTRIAL 1.03 1.05
- - ---------------------
TOTAL 1.07 1.18
- - ---------------------
INVESTMENT CASTINGS
On December 2, 1997, the Company purchased an additional 13 percent of Howmet
common stock for $183.8 million, increasing the Company's ownership percentage
to 62 percent. Fiscal year 1998 includes consolidated Howmet results for seven
months at 62 percent and Howmet equity income at 49 percent for five months.
The following unaudited information summarizes Howmet's results, including the
38 percent minority share, before consolidation for the twelve months ended
June 30:
DOLLAR PERCENT
(IN MILLIONS) 1998 1997 CHANGE CHANGE
- - ------------------------------------------------------------------
NET SALES $1,279.3 $1,205.0 74.3 6
COST OF GOODS SOLD 946.8 902.7 44.1 5
GROSS PROFIT 332.5 302.3 30.2 10
OPERATING INCOME 166.1 138.3 27.8 20
INCOME BEFORE EXTRAORDINARY ITEM 85.7 57.1 28.6 50
NET INCOME $ 73.4 $ 57.1 16.3 29
- - ------------------------------------------------------------------
Following is a reconciliation of Howmet's contribution to the Company's income
for the twelve months ended June 30:
(IN MILLIONS) 1998 1997
- - -------------------------------------------------------------------
HOWMET INCOME BEFORE EXTRAORDINARY ITEM $85.7 $57.1
LESS PREFERRED PAID-IN-KIND DIVIDEND (5.3) (4.9)
- - -------------------------------------------------------------------
INCOME AVAILABLE TO COMMON SHAREHOLDERS 80.4 52.2
- - -------------------------------------------------------------------
COMPANY'S INTEREST IN HOWMET INCOME 46.4 25.6
ADD PREFERRED PAID-IN-KIND DIVIDEND 5.3 4.9
- - -------------------------------------------------------------------
HOWMET'S CONTRIBUTION TO THE COMPANY'S INCOME BEFORE
EXTRAORDINARY ITEM $51.7 $30.5
- - -------------------------------------------------------------------
Howmet's sales for the twelve months ended June 30, 1998, increased $130.5
million or 11.5 percent on a comparable basis with the prior year, adjusting
for the sale of the lower margin refurbishment business. The sales increase
came from both the aerospace and industrial gas turbine (IGT) markets. Howmet's
fiscal 1997 sales included an additional $9.7 million in revenue from a pricing
adjustment with a customer that was not repeated in fiscal 1998 and is not
expected to recur in the future.
Howmet's earnings before extraordinary item were $85.7 million for fiscal 1998,
an increase of 50 percent from $57.1 million in the prior year's period. Income
benefited from higher sales volume, improved operating performance, a 39
percent reduction of interest expense, and a lower effective tax rate. Howmet's
current period results include an extraordinary charge of $12.3 million, net of
taxes, for debt refinancing to take advantage of favorable interest rates and
to eliminate certain restrictive covenants. Howmet's twelve-month earnings were
reduced by $5.8 million after-tax for initial public
F-32
<PAGE>
offering (IPO) expenses and a one-time incremental stock appreciation rights
accrual recorded as a result of the IPO. Also affecting comparability between
the two years was an additional $6.5 million warranty expense charge in fiscal
1998. The prior year included an after-tax $5.8 million benefit from the
pricing adjustment mentioned above.
INCOME TAXES AND GENERAL AND ADMINISTRATIVE EXPENSE
In fiscal 1998, the Company had an effective income tax rate before
extraordinary item of 34.2 percent, compared with 28.5 percent for the prior
year. The current year higher rate is due primarily from consolidating Howmet,
whose effective tax rate since December 2, 1997 has been 41 percent. In
addition, Cordant must continue to accrue tax at a 7 percent rate on its share
of Howmet net income. The Company's effective income tax rate would have been
higher if not for a reduced rate resulting from a United States tax benefit
related to a reorganization of investments in certain overseas operations, from
the recognition of certain tax refunds, and from the return to tax
profitability of certain European operations enabling the use of tax loss
carry-forward amounts.
General and administrative expense for fiscal 1998 increased 112 percent or $90
million compared to the prior year. The increase was attributable to the
consolidation of Howmet, which had general and administrative expenses of $85.2
million. Goodwill amortization increased $2.3 million due to the purchase of an
additional 13 percent of Howmet in December. General Corporate expenses were
approximately the same in fiscal 1998 and 1997. Fastening Segment
administrative expenses increased slightly. Interest expense increased $14.5
million due to consolidating Howmet's results as well as the increased debt
levels associated with the additional purchase of 13 percent of Howmet common
stock and the Jacobson Manufacturing acquisition.
SELECTED UNAUDITED FINANCIAL DATA
For the Twelve Months Ended June 30:
1998 1997
- - ------------------------------------------------------------------------
(IN MILLIONS) CORDANT HOWMET (b) CONSOLIDATED CORDANT
- - ------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING
ACTIVITIES $146.5 $ 61.6 $208.1 $114.1
CAPITAL EXPENDITURES (21.9) (50.9) (72.8) (33.1)
DIVIDENDS (14.6) (14.6) (13.2)
- - ------------------------------------------------------------------------
FREE CASH FLOW $110.0 $ 10.7 $120.7 $ 67.8
- - ------------------------------------------------------------------------
TOTAL DEBT(a) $333.3 $172.9 $506.2 $ 24.6
LESS CASH & CASH EQUIVALENTS 7.3 10.1 17.4 51.4
- - ------------------------------------------------------------------------
NET DEBT (CASH) POSITION $326.0 $162.8 $488.8 $(26.8)
- - ------------------------------------------------------------------------
(a) Excludes Pechiney note payable.
(b) Howmet's results since December 2, 1997.
F-33
<PAGE>
FISCAL 1998 FOURTH QUARTER RESULTS
Summary unaudited financial information for the three months ended June 30
follows:
(IN MILLIONS EXCEPT PER SHARE DOLLAR PERCENT
DATA) 1998 1997 CHANGE CHANGE
- - -----------------------------------------------------------------
SALES
PROPULSION SYSTEMS $192.2 $173.8 $ 18.4 11
FASTENING SYSTEMS 100.7 81.8 18.9 23
INVESTMENT CASTINGS 335.7 335.7
- - -----------------------------------------------------------------
TOTAL SALES $628.6 $255.6 $373.0 146
- - -----------------------------------------------------------------
OPERATING INCOME
PROPULSION SYSTEMS $ 22.9 $ 10.8 $ 12.1 112
FASTENING SYSTEMS 16.7 10.6 6.1 58
INVESTMENT CASTINGS 48.8 48.8
UNALLOCATED CORPORATE EXPENSE (6.6) (1.6) (5.0) (313)
- - -----------------------------------------------------------------
TOTAL OPERATING INCOME 81.8 19.8 62.0 313
- - -----------------------------------------------------------------
EQUITY INCOME OF AFFILIATES 11.7 (11.7) (100)
INTEREST INCOME 3.8 1.7 2.1 124
INTEREST EXPENSE (6.9) (.2) (6.7) (3,350)
OTHER, NET (.3) (.3)
INCOME TAXES (27.4) (9.3) (18.1) (195)
- - -----------------------------------------------------------------
INCOME BEFORE MINORITY INTEREST 51.0 23.7 27.3 115
MINORITY INTEREST (9.9) (9.9)
- - -----------------------------------------------------------------
NET INCOME $ 41.1 $ 23.7 $ 17.4 73
- - -----------------------------------------------------------------
NET INCOME PER DILUTED SHARE: $ 1.09 $ .63 $ .46 73
The increased sales and income for the fourth quarter ended June 30, 1998, were
due primarily to the consolidation of Howmet; however, excluding the increase
due to consolidating Howmet, sales increased 15 percent, and operating income
increased 67 percent from the prior year.
Propulsion systems sales increased 11 percent compared to the prior year's
quarter. The higher sales were due to advanced materials purchased for the RSRM
Buy III and Buy IV programs, increased commercial launch motor revenues, and
higher missile defense program activity. Operating income increased 112 percent
from the prior year period. The higher income was due to increased sales,
higher margins in the commercial launch motor program, and reduced corporate
overhead allocations due to increased ownership in Howmet. Propulsion systems
margins increased to 11.9 percent for the quarter compared to 6.2 percent in
the prior year period primarily because of reduced corporate overhead
allocation and program efficiencies.
Fastening systems sales and income increased due to higher sales in both the
aerospace and industrial markets. Aerospace sales and income increased $10.6
million and $2.3 million, respectively, while industrial sales and income
increased $8.3 million and $3.8 million, respectively. The growth in income was
due to higher sales and continued emphasis on cost reduction that resulted in
improved margins. Fastening systems margins improved to 16.6 percent for the
quarter compared to 13 percent for the prior year period.
F-34
<PAGE>
Fastening Systems book-to-bill ratios, which are orders divided by shipments,
for the quarter ended June 30, were as follows:
1998 1997
- - ---------------------
AEROSPACE .89 1.36
INDUSTRIAL .98 1.04
- - ---------------------
TOTAL .93 1.21
- - ---------------------
On December 2, 1997, the Company purchased an additional 13 percent of Howmet
common stock, increasing the Company's ownership percentage to 62 percent. The
current quarter includes consolidated Howmet results. The following unaudited
information summarizes Howmet's results, including the 38 percent minority
share, before consolidation for the three months ended June 30:
DOLLAR PERCENT
(IN MILLIONS) 1998 1997 CHANGE CHANGE
- - ------------------------------------------------
NET SALES $335.7 $330.4 5.3 2
COST OF GOODS SOLD 247.4 240.0 7.4 3
GROSS PROFIT 88.3 90.4 (3.3) (4)
OPERATING INCOME 49.8 47.2 2.6 6
NET INCOME $ 27.4 $ 22.6 4.8 21
- - ------------------------------------------------
Following is a reconciliation of Howmet's contribution to the Company's income
for the three months ended June 30:
(IN MILLIONS) 1998 1997
- - ------------------------------------------------------------
HOWMET NET INCOME $27.4 $22.6
LESS PREFERRED PAID-IN-KIND DIVIDEND (1.4) (1.3)
- - ------------------------------------------------------------
INCOME AVAILABLE TO COMMON SHAREHOLDERS 26.0 21.3
- - ------------------------------------------------------------
COMPANY'S INTEREST IN HOWMET INCOME 16.1 10.4
ADD PREFERRED PAID-IN-KIND DIVIDEND 1.4 1.3
- - ------------------------------------------------------------
HOWMET'S CONTRIBUTION TO THE COMPANY'S INCOME $17.5 $11.7
- - ------------------------------------------------------------
Howmet's sales for the current quarter increased $25.5 million or 8 percent on
a comparable basis with the prior year period, adjusting for the sale of the
lower margin refurbishment business. The sales increase came from both the
aerospace and IGT markets. Also affecting second quarter comparability is $6.3
million of additional revenue in fiscal 1997 from a pricing adjustment with a
customer that was not repeated in 1998 and is not expected to recur in the
future.
Howmet's net income increased $4.8 million or 21 percent over the prior year's
quarter. The prior year's quarter benefited from the $6.3 million ($3.8 million
after tax) of additional revenue described above which had no associated costs.
Interest expense decreased by $5.3 million ($3.2 million after tax) or 60
percent over the prior year's quarter due to significantly lower debt levels
and the lower interest expense due to the debt refinancing.
INCOME TAXES AND GENERAL AND ADMINISTRATIVE EXPENSES
The Company's effective income tax rate for the fourth fiscal quarter was 35
percent compared with 28 percent in last year's quarter. The current quarter's
higher rate is due primarily from consolidating Howmet, whose effective rate
was 40 percent. In addition, Cordant must continue to accrue tax at a 7 percent
rate on its share of Howmet's net income. The Company's effective income tax
rate would have been higher if not for a reduced rate resulting from a United
States tax benefit related to a reorganization of investments in certain
overseas operations, from the recognition of certain tax refunds, and from the
return to tax profitability of certain European operations enabling the use of
tax loss carry-forward amounts.
F-35
<PAGE>
General and administrative expense for the quarter increased 162 percent or $35
million compared to the prior year's quarter. The increase was attributable to
the consolidation of Howmet, which had general and administrative expenses of
$33 million. Goodwill amortization increased $1 million due to the purchase of
an additional 13 percent of Howmet common stock. Interest expense increased due
to increased debt levels related to borrowings to finance the additional 13
percent increase in Howmet stock and from consolidating Howmet's interest
expense.
SELECTED FINANCIAL DATA
For the Quarter Ended June 30:
1998 1997 (a)
---------------------------- --------
(IN MILLIONS) CORDANT HOWMET CONSOLIDATED CORDANT
- - ------------------------------------------------------------
NET CASH PROVIDED BY
OPERATING ACTIVITIES $64.7 $ 41.4 $106.1 $33.8
CAPITAL EXPENDITURES (7.6) (19.2) (26.8) (6.2)
DIVIDENDS (3.7) (3.7) (3.8)
- - ------------------------------------------------------------
FREE CASH FLOW $53.4 $ 22.2 $ 75.6 $23.8
- - ------------------------------------------------------------
(a) Howmet was not consolidated until December 1997.
RESULTS OF OPERATIONS FISCAL YEAR 1997 COMPARED TO FISCAL YEAR 1996
Net income for 1997 was $82.4 million or $2.21 per share, an increase of 40
percent compared to $58.3 million or $1.57 in 1996. Net income for 1996
included recognition of $21.3 million after-tax ($.57 per share) of income
related to income taxes and after-tax fastening systems charges of $8.5 million
($.23 per share) for inventory and $5.9 million for restructuring ($.16 per
share). Net income for 1997 included after-tax income related to income tax
refunds and interest on the refunds and restructuring credits totaling $9.7
million after-tax or $.26 per share.
Summary unaudited financial information for the twelve months ended June 30,
1997 follows: (in millions except per share data)
DOLLAR
1997 1996 CHANGE PERCENT
- - --------------------------------------------------------------
SALES
PROPULSION SYSTEMS $606.1 $651.1 $(45.0) (7)
FASTENING SYSTEMS 284.0 238.4 45.6 19
- - --------------------------------------------------------------
TOTAL SALES $890.1 $889.5 $ .6
- - --------------------------------------------------------------
OPERATING INCOME
PROPULSION SYSTEMS $ 55.1 $ 77.1 $(22.0) (29)
FASTENING SYSTEMS 27.0 (6.3) 33.3
UNALLOCATED CORPORATE EXPENSE (6.5) (9.0) 2.5 28
- - --------------------------------------------------------------
TOTAL OPERATING INCOME 75.6 61.8 13.8 22
EQUITY INCOME, HOWMET 30.5 4.5 26.0 578
INTEREST INCOME 10.9 30.2 (19.3) (64)
INTEREST EXPENSE (1.7) (3.9) 2.2 56
INCOME TAXES (32.9) (34.3) 1.4 4
- - --------------------------------------------------------------
NET INCOME $ 82.4 $ 58.3 $ 24.1 41
- - --------------------------------------------------------------
NET INCOME PER DILUTED SHARE: $ 2.21 $ 1.57 $ .64 41
- - --------------------------------------------------------------
Business Segment Sales and Income For 1997 versus 1996
Propulsion systems sales declined in 1997 compared to 1996 due to defense sales
being down $60 million partially offset by an increase in space programs of $15
million.
F-36
<PAGE>
Propulsion systems income was down $22 million compared to 1996 as a result of
completion of the shuttle processing contract in 1996, reduced margins on the
RSRM contract, and additional start-up and warranty costs on commercial launch
motors. Defense-related programs income declined $11.2 million due to lower
activity as a result of reduced government spending, completion of several
defense programs during fiscal year 1996, and closure of two government-owned
contractor-operated (GOCO) plants.
Fastening systems sales and income in 1997 increased $45.6 million and $33.3
million, respectively, over 1996. Commercial aerospace sales were up $38.9
million. The increase in sales provided a corresponding increase in income.
Cost reductions due to plant closures and consolidations, and relocation of the
subsidiary headquarters also contributed to income. Pre-tax income in 1997
benefited $.8 million from the reversal of excess restructuring reserves versus
the 1996 $18.1 million pre-tax charges for inventory and restructuring.
Excluding both non-recurring items, 1997 income increased 121 percent.
Fastening systems margins increased to 9.2 percent in 1997 from 5 percent in
1996 excluding unusual items.
Net income for 1997 included $28.3 million or $.76 per share from the Company's
investment in Howmet.
Also affecting income was a 28.5 percent effective tax rate for 1997 compared
to 37 percent for 1996, reflecting the lower 7 percent tax rate on higher
equity income from Howmet.
Excluding unusual items in both years, net income in the current year increased
by 40 percent or $.56 per share.
General and administrative expense for 1997 increased 15 percent or $10.7
million compared to 1996. General Corporate expense increased $7.7 million
while selling and administrative costs increased $3 million in the fastening
systems segment. Interest expense decreased $2.2 million as a result of the
reduction in short-term debt.
RESTRUCTURING AND IMPAIRMENT DURING 1996
As a result of a comprehensive review of the Company's operating performance in
Europe, a pre-tax restructuring charge of $5.9 million was recognized in the
second quarter of 1996 relating to the anticipated shutdown of the fastening
system's Germany operations. During the third quarter of fiscal year 1996, the
Company notified the 82 affected employees of the Germany plant shutdown. The
charge included $3.6 million of employee severance expense and $1.7 million
write down of long-lived assets.
During the 1993-1994 defense industry downturn, pricing pressures required the
Company to review operations and reduce operating costs to remain competitive.
During the third quarter of 1995, the Board of Directors determined a
consolidation of the Company's manufacturing facilities and associated write-
down of assets was required. The Company recorded a $61.4 million pre-tax
defense systems restructuring and related impairment charge including a $20
million write down for impaired long-lived assets and a $23.6 million write
down of goodwill. Fair value of goodwill and fixed asset write-downs was
determined by estimating discounted cash flows from future defense and non-
shuttle vehicle operations. Also included was an estimated restructuring loss
of $10.5 million on the disposition of fixed assets from two manufacturing
facilities (Huntsville and Omneco), and a $7.3 million cash restructuring
charge for costs related to the facility closures including $2.3 million of
employee severance costs. The restructuring included 360 employee terminations.
Fair value of the Huntsville and Omneco assets was based on estimated cash
proceeds from asset sales net of the costs of disposal. During the second
quarter of 1997, the restructuring was substantially completed and excess
reserves from both programs were closed and credited to income. The propulsion
and the fastening systems segments recognized $1.4 million and $.8 million in
income, respectively. The restructuring plan included charges for certain
issues that have not currently been resolved and the Company believes remaining
reserves will be adequate to cover future costs.
F-37
<PAGE>
A summary of restructuring reserve activity by program follows:
U.S. GERMANY
PLANTS PLANT
(IN MILLIONS) SHUTDOWN SHUTDOWN TOTAL
- - ----------------------------------------------------------------
RESERVE BALANCE AT MARCH 31, 1995 $17.8 $ 17.8
REDUCTIONS (NONCASH) (.5) (.5)
PAYMENTS MADE (.3) (.3)
- - ----------------------------------------------------------------
BALANCE AT JUNE 30, 1995 17.0 17.0
FASTENING SYSTEMS RESTRUCTURING $ 5.9 5.9
REDUCTIONS (NONCASH) (8.7) (2.3) (11.0)
PAYMENTS MADE (.9) (.9)
- - ----------------------------------------------------------------
BALANCE AT JUNE 30, 1996 7.4 3.6 11.0
REDUCTIONS (NONCASH) (5.2) (2.8) (8.0)
PAYMENTS MADE (.8) (.8)
- - ----------------------------------------------------------------
FISCAL YEAR 1997 RESTRUCTURING CREDIT $ 1.4 $ .8 $ 2.2
- - ----------------------------------------------------------------
The Company has successfully negotiated with the government for recovery of
certain of these costs. The Company estimates approximately $9 million to be
recognized in Company profits during fiscal year 1998 through fiscal year 2000.
EQUITY INVESTMENT IN HOWMET
In December 1995 the Company purchased 49 percent of Howmet Corporation. The
Company's 1997 results include equity income of $30.5 million, reflecting a
full year of Howmet ownership compared to $4.5 million of equity income for the
28 weeks of Company ownership in 1996. Howmet experienced an 18.5 percent
increase in sales for the 12 months ended June 30, 1997, compared to the same
period in the prior year, reflecting an increased demand in the commercial
aerospace market and continued strength in the industrial gas turbine market.
Howmet's income increased in 1997 due to: sales increasing 18.5 percent,
additional revenue of $9.7 million from the finalization of a pricing
adjustment with a major customer, fixed cost containment, variable cost
reduction, and other operational improvements, a lower effective tax rate of 44
percent in 1997 compared to 60 percent in 1996, and lower interest expense due
to lower debt and lower interest rates in 1997 compared to 1996. Partially
offsetting the above increases were additional stock appreciation rights
expense of $20.7 million recorded in 1997 versus 1996.
FUTURE OPERATIONS/BUSINESS ENVIRONMENT
The Company operates its largest business segment, investment castings, through
its Howmet subsidiary. Howmet manufactures precision investment castings for
the jet aircraft and IGT markets. Demand for this segment's products is
affected primarily by trends in the commercial aviation and IGT markets, which
currently are favorable. Based on the anticipated continued strength of these
markets and other opportunities, management expects sales to increase in the
upcoming year.
Sales to the aero engine market represent approximately 51% of Howmet's total
sales and is comprised of components for new aircraft and for aftermarket
replacement. Demand in this market is expected to remain strong and to be the
net result of three key factors. Aftermarket production, now approximately half
of Howmet's aero output, is expected to grow both in amount and as a percentage
of total sales. The expectation of such growth is driven by the fact that
commercial aircraft (50 passenger and larger) in service have now surpassed
12,000 aircraft and are projected to grow to 17,000 by 2007. A second factor
affecting the demand for Howmet's aero castings is the shift by engine OEM's
toward the technologically advanced directional solidification (DS) and single
crystal (SC) airfoils for which Howmet is a demonstrated market leader. A third
factor in estimating aero sales is the anticipated decline in new aircraft
production. While the timing is uncertain, the consensus among industry
analysts is that a downturn may occur in 2000. Management expects the
F-38
<PAGE>
strength of aftermarket sales, combined with the trend to use the most
technologically advanced components, to more than offset the adverse effects of
the anticipated decline in new aircraft production. These anticipated
developments, along with several recently received major, long-term contracts,
are expected to result in demand which exceeds existing capacity for DS and SC
airfoils. In response to this demand, in the fourth quarter of calendar 1998,
Howmet will begin construction of a new aero-airfoil plant dedicated to the
high-volume production of DS and SC airfoils. The plant will be a 120,000
square-foot facility. It will initially have the capacity to produce $60
million in annual revenue and will require an investment of $40 million. The
plant design will allow for future expansion to produce $100 million in annual
revenue.
Sales to the IGT market represent approximately 32% of investment casting
sales. Howmet holds a majority share of the market for IGT castings, and
anticipates growing demand both for OEM sales and for aftermarket replacement
parts. The anticipated increase in aftermarket sales is expected to be driven
by an aging and growing installed base of engines. A recent surge of IGT orders
has caused Howmet to accelerate plans to expand IGT casting capacity at three
of its existing plants. The expansions will be principally for DS and SC
components.
In addition to the aforementioned expansions, Howmet invested $12 million in
1997 and 1998 to expand its coating capabilities, and during 1998 and 1999,
Howmet will invest $15 million to build a new plant in Montreal, Canada, which
will be the largest and most technologically advanced facility dedicated to the
production of aluminum castings.
The Propulsion systems segment produces high-technology solid propellant motors
for space and defense applications. Production of and services for the RSRM
represented 22 percent of 1998 consolidated sales and 24 percent of
consolidated operating income. The current contract with NASA extends the
Company's production of the RSRM through fiscal year 2001. The Company's
proposal for the RSRM Buy IV contract was submitted to NASA in April 1998. The
Buy IV Request for Proposal baseline requests 35 flight sets, or 70 motors, and
three flight support motors with contract completion expected in 2004. Motor
deliveries and periods of performance may change in negotiations. Currently,
the Company anticipates follow-on contracts for RSRM motors through the life of
the Space Shuttle Program. The contract type is anticipated to be a cost-plus-
incentive/award-fee, similar to the current Buy III structure. NASA has
provided the Company with long lead material procurement authorization to
support a Buy IV production start in September 1998. The contract is subject to
annual Congressional funding.
RSRM Buy III contract incentives to reduce costs over the life of the contract
should result in higher incentive fees in the future based on actual and
anticipated contract cost performance. Cost management award fees of $109.8
million have been recognized on the current RSRM Buy III contract. Realization
of such fees is reasonably expected based on actual and anticipated contract
cost performance. However, all of the cost management award fees remain at risk
until completion of the current contract and final NASA review. Unanticipated
program problems, which erode cost management performance, could cause some or
all of the recognized cost management award fees to be reversed and would be
offset against receivable amounts from the government or be directly reimbursed
to the government. Circumstances that could erode cost management performance
include, but are not limited to: a failure of a Company supplied component;
performance problems with the RSRM leading to a major redesign and/or
requalification effort; manufacturing problems, including supplier problems,
that could result in RSRM production interruptions or delays; and, major safety
incidents.
The level of United States Government funding of space programs including the
Space Station may impact the Space Shuttle launch schedule. The availability of
Space Station hardware to meet the current schedule may also impact future
launch rates and RSRM production. Presently, there have been no production
schedule changes from NASA. Significant reductions in the launch schedule would
lower the Company's production rates and reduce related revenue and profits to
the Company. The Company participates in the commercial satellite launch
business through the Castor(R) and Star(TM) series of motors. This business is
projected to grow during the next year.
The Company expects its defense sales and income to stabilize over the next 18
months. Generally the industry is characterized by significant over capacity.
Decreased defense spending has created a highly
F-39
<PAGE>
competitive pricing environment for tactical programs and has reduced margins
on existing programs and new program opportunities. Thiokol Propulsion's
selection as the propulsion team leader in the Air Force's Minuteman program is
expected to be worth over $1 billion in sales over the next 10-15 years. The
primary production phase of this program is not expected to begin until the
year 2001, at which time there is expected to be an increase in sales.
The fastening systems segment operates in both aerospace and industrial
markets. The aerospace segment is greatly influenced by commercial aircraft
build schedules that have increased significantly over the last two years but
are anticipated to decrease slightly beginning in fiscal year 1999. Military
aircraft spending is expected to continue at low production levels. As a result
of efficient manufacturing initiatives and other cost control efforts, the
recent growth in operating margins is expected to continue.
The fastening system's industrial product lines saw substantial growth in sales
and income in 1998. This increase was due primarily to the strong heavy-duty
truck/trailer market, which continues at near record levels. Along with the
strong heavy-duty truck market, fastening systems are expected to continue to
gain new applications in both the U.S. and European markets. With the recent
operational improvements and a strong focus on selling higher margin products,
operating margins may continue to improve.
The Company completed its $273.6 million acquisition of Jacobson Manufacturing
on June 11, 1998. Jacobson is a manufacturer of high-quality, custom-designed
metal parts and fasteners and precision-engineered plastic products which will
be reported as part of the fastening systems segment. Its products are used in
automotive, construction, consumer products and heavy equipment applications.
Jacobson's injection molded plastic products include a variety of components
and end products used in the computer, telecommunications and medical
industries. These new product lines significantly broaden the Company's
industrial fastener sector and provide new opportunities in a growing market
for precision plastic components. Jacobson has six manufacturing facilities
located in the United States. Jacobson revenues for the next twelve months are
projected to be approximately $150 million.
OTHER MATTERS
The Company has operating leases, the majority of which are short-term and real
estate related. Rental expense was $19.6 million in 1998. Renewal and purchase
options are available on certain of these leases. Future minimum rental
commitments under non-cancelable operating leases total approximately $45
million with $14.3, $11.8, $6.9 and $2.9 million committed in 1999 through
2002, respectively, and $9.2 million thereafter.
The Company is involved in various legal proceedings and uncertainties
including those related to environmental matters as discussed in Notes 16 and
17 to the consolidated financial statements.
ASIAN ECONOMIC CONDITIONS
The adverse Asian economic conditions caused no material impact to Company
sales or earnings during the year. Propulsion systems sales in Asia are
minimal. The future impact to investment castings and fastening systems is
uncertain. To the extent Asian economic conditions impact the commercial
aerospace, heavy-duty truck/trailer and IGT markets, such impact may affect the
Company in the future.
FISCAL YEAR CHANGE
The Company will change its fiscal financial reporting year-end from June 30 to
a calendar year effective for the quarter ended September 30, 1998. The change
by the Company is to coordinate Cordant and Howmet reporting periods and to
reduce the confusion that accompanies a fiscal year versus a calendar year.
Howmet currently reports separately on a calendar year basis.
MARKET RISK
The Company's long and short-term debt portfolio consists of both variable and
fixed-rate instruments. The Company currently does not utilize interest rate
derivative contracts. At June 30, 1998,
F-40
<PAGE>
approximately $393 million (including $55 million from Howmet's receivables
securitization facility) of the Company's debt is tied to the London Interbank
Offered Rates (LIBOR) interest rate. If the interest rate on this variable-rate
debt were to change by 1 percent, net income would hypothetically increase or
decrease by $1.7 million. If the interest rate on the Company's fixed-rate debt
of $168 million were to change 1 percent, net income would hypothetically
increase or decrease by $1 million. This hypothetical analysis does not take
into consideration the effects of the economic conditions that would give rise
to such an interest rate change or the Company's response to such hypothetical
conditions, nor does it take into effect changes from the June 30, 1998, debt
amounts.
The Company enters into forward exchange contracts to manage certain foreign
currency exposures. These forward exchange contracts are hedges for risk
management and are not used for trading or speculative purposes. Such hedges
comply with Company policies approved by the Board of Directors. To mitigate
the effects of changes in currency exchange rates on that portion of the
foreign operations business conducted in U.S. dollars, the Company regularly
hedges by entering into foreign exchange forward contracts to cover near-term
exposures. At June 30, 1998, for hedging purposes, the Company had the
following forward exchange contracts outstanding:
<TABLE>
<CAPTION>
(IN MILLIONS) CONTRACT & U.S LOCAL UNREALIZED
CURRENCY DOLLAR CURRENCY GAIN MATURITY
LOCAL CURRENCY TYPE EQUIVALENT EQUIVALENT (LOSS) DATES
- - ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
UNITED KINGDOM POUNDS BUY USD $18.0 11.1 $(.5) JULY 1998 TO JANUARY 1999
UNITED STATES DOLLARS BUY CAD 1.6 1.6 (.1) JULY 1998 TO SEPTEMBER 1998
CANADIAN DOLLARS BUY USD 1.2 1.6 JULY 1998 TO DECEMBER 1998
JAPANESE YEN BUY USD 2.0 256.6 .1 JULY 1998 TO DECEMBER 1998
UNITED STATES DOLLARS BUY JPY 3.4 3.4 (.1) JULY 1998
FRENCH FRANCS SELL USD 3.7 22.1 JULY 1998 TO DECEMBER 1998
MISCELLANEOUS 1.9 .1 JULY 1998 TO DECEMBER 1998
- - ----------------------------------------------------------------------------------------------
$31.8 $(.5)
- - ----------------------------------------------------------------------------------------------
</TABLE>
The fair value of these foreign exchange contracts was estimated based on June
30, 1998, foreign exchange rates obtained from dealers. If the U.S. dollar were
to strengthen or weaken against these currencies by 10 percent, the
hypothetical value of the contracts would increase or decrease by approximately
$1.2 million. However, these forward exchange contracts are hedges,
consequently any market value gains or losses arising from these foreign
exchange contracts are offset by foreign exchange losses or gains on the
underlying commitments. Calculations of the above effects assume that each rate
changed in the same direction at the same time relative to the U.S. dollar.The
calculations reflect only those differences resulting from mechanically
replacing one exchange rate with another. They do not factor in any potential
effects that changes in currency exchange rates may have on income statement
translation, sales volume and prices, and on local currency costs of
production.
The Company's international operation's identifiable assets totaled $314.8
million at June 30, 1998. Foreign debt at June 30, 1998, totaled $19.4 million
and partially offsets the effect of any change in foreign exchange rates. Such
rate changes are reflected in the translation adjustment recorded in the equity
section of the balance sheet. The Company does not hedge its foreign currency
net asset exposures. The Company also has some commodity price risk but does
not currently hedge commodity-related transactions. For additional information
on policies and discussion of the Company's foreign exchange and financial
instruments, see Notes 1 and 20 of the notes to the consolidated financial
statements.
YEAR 2000 COMPLIANCE
The Company has a decentralized Information Systems (I.S.) function, in which
each of its three major business segments operate autonomously with its own
I.S. organization. The Thiokol Propulsion I.S. organization is moving toward
completing a scheduled three-year Year 2000 date readiness project
F-41
<PAGE>
that addresses all major production applications supported by the propulsion
systems segment. The project's objective is to identify all date-related
program logic, to correct, replace or eliminate all date processing problems,
and to test and implement into production the corrected application software.
The project is on schedule with over 80 percent of the planned work completed.
The project is expected to be completed by December 31, 1998, with system-wide
testing activity occurring after that date. The estimated cost for the project
is $7.5 million, which is being expensed as incurred over the three-year life
of the project. The Thiokol Propulsion I.S. organization has requested its
vendors of application or operating system software products to provide a
status and commitment regarding the readiness of their respective products for
the Year 2000. Most responses indicate that vendors have solutions either in
place or have scheduled future versions to correct this problem.
Huck (fastening systems) uses primarily standard commercial, vendor-supported
application software products. These systems can be made Year 2000 compliant by
upgrading to current versions of the vendors' software products. Huck recently
purchased a new Enterprise Requirements Planning (ERP) software product that is
Year 2000 and Euro compliant and will be implemented at all Huck sites over the
next three years. During the next twelve months, approximately one-half of
Huck's facilities will be converted to the new software, thereby avoiding the
need to upgrade the old systems at those sites to achieve Year 2000 readiness.
All remaining sites, meanwhile, will be made compliant by upgrading to current
versions of the existing software products as described above. This dual
approach will address all Year 2000 readiness requirements by June 30, 1999.
Those costs associated with software purchases and with Year 2000 readiness are
estimated at $8.6 million.
Howmet (investment castings) I.S. is actively working its Year 2000 readiness
issues. All date logic concerns on its central mainframe applications and
distributed server applications have been identified and remedial action to
correct or replace the problematic code is currently under way. Howmet is
currently reviewing its various remote plant facilities to identify and begin
implementing any needed changes to both local business applications and shop
floor control systems. All corrective action projects are expected to be
completed by June 30, 1999. To date, no material risk of non-compliance has
been identified. Howmet has also initiated formal communications with all of
its significant suppliers, including raw materials, services, and computer
hardware/software suppliers, and large customers to determine the extent to
which Howmet's manufacturing processes and interface systems are vulnerable to
those third parties' failure to resolve their own Year 2000 issues. Early
responses have indicated no significant problems.
Additionally, Howmet is installing several commercial application software
products, at both its central facility and at certain plant sites, to further
address their Year 2000 readiness. Howmet's total estimated year 2000 cost is
$14.6 million, spread over the three-year life of the project.
During 1999, all three business segments will focus on further evaluation of
customer and supplier readiness, embedded processor systems, risk assessment,
worst case scenarios and contingency planning. There can be no guarantee that
the systems of other companies on which the Company's systems rely will be
timely converted and would not have an adverse effect on the Company's systems.
LIQUIDITY AND CAPITAL RESOURCES
As previously discussed, the increase in the Company's Howmet ownership to 62
percent and subsequent consolidation has resulted in consolidating seven months
of Howmet's cash flows with that of the Company in the current fiscal year. Due
to the consolidation of Howmet, comparison of the current year to the prior
years' cash flows is difficult. Separate cash flow information for Howmet has
been included below for the respective periods being reported.
Cash flow provided by operations was $208.1 million compared to $114.1 million
in 1997. The current year benefited from increased net income. The increase in
depreciation and amortization over the prior year was due primarily to the
consolidation of Howmet. The decrease in accounts payable and accrued expenses
was attributable primarily to the consolidation of Howmet. Howmet's decreases
F-42
<PAGE>
in accounts payable and accrued expenses were due to lower accrued compensation
and the utilization of accrued liabilities associated with the September 1997
sale of Howmet's refurbishment business. The increase in inventory primarily
resulted from increases at Howmet to meet increased customer demand.
The purchase of an additional 13 percent of outstanding Howmet common stock
used $183.8 million of cash, less $27.2 million of acquired cash or $156.6
million. The purchase of Jacobson Manufacturing used $273.6 million. Capital
spending on property, plant and equipment used $72.8 million in the current
year compared to $33.1 million in the prior year. The increased capital
spending was due to the addition of Howmet, but was partially offset by
decreased capital spending in the fastening systems segment.
Financing activities for the year provided $257.1 million of cash compared to
$47.3 million of cash used in the prior year. During the year, the Company
issued $150 million of 6 5/8 percent senior notes due March 1, 2008 to replace
the $138 million of bank debt under its revolving credit agreement incurred for
the purchase of 13 percent of Howmet common stock. The notes were priced at
99.423 percent, to yield 6.705 percent. The notes were offered pursuant to a
prospectus supplement dated February 26, 1998, under the Company's $300 million
shelf registration statement that has been effective since October 1996. In
June, the Company borrowed $180 million to finance the purchase of Jacobson
Manufacturing. In December 1997, Howmet refinanced its debt to take advantage
of favorable interest rates. As part of the refinancing, Howmet incurred pre-
tax charges of $20.2 million, including a $6.5 million non-cash charge for the
write-off of unamortized debt issuance costs. Howmet repaid $146 million of
debt at a 10 percent fixed interest rate, and borrowed $198 million of new debt
under a new revolving bank facility at a substantially lower variable rate.
During the year, the Company repurchased 481,000 shares (adjusted for the stock
split) of the Company's common stock for $18.7 million. The Company did not
repurchase shares in the prior fiscal year. There are approximately 2.5 million
shares available for repurchase under the Company's current share repurchase
authorization. The Company will repurchase shares in amounts as the Company
deems appropriate.
Cordant does not have access to Howmet cash balances except through Howmet
declaring a cash dividend to its shareholders. Howmet does not currently intend
to pay dividends. The initial public offering of Howmet stock in December,
which redistributed ownership of Howmet from Carlyle to the public, did not
generate any cash to Howmet or to the Company.
The Company's current ratio was 1.4, excluding the Restricted Trust and the
Pechiney Notes payable, which is a decrease from 2.2 in the prior year. The
debt-to-equity ratio increased to 83.1 percent, excluding the Pechiney Notes
payable, from 4.7 percent in the prior year due to the Howmet and Jacobson
acquisitions. The debt-to-total-capital ratio was 48 percent and includes the
$55 million receivable facility at Howmet. Working capital was $159.3 million,
a $12.9 million decrease from June 30, 1997.
Estimated future cash flows from operations, current financial resources, and
available credit facilities are expected to be adequate to fund the Company's
anticipated working capital requirements, capital expenditures, dividend
payments, and stock repurchase program.
At June 30, 1998, the Company, excluding Howmet, had available $300 million in
revolving credit facilities with $150 million unused. In addition, on June 30,
1998, Howmet had a $300 million revolving credit facility with $147.4 million
available for additional borrowing and/or letters of credit.
F-43
<PAGE>
HOWMET LIQUIDITY
A comparative cash flow statement for Howmet for the year ended June 30
follows:
HOWMET CASH FLOW (UNAUDITED)
(IN MILLIONS) 1998 1997
- - ------------------------------------------------------------------------------
OPERATING ACTIVITIES
NET INCOME $ 73.5 $ 57.1
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY
OPERATING ACTIVITIES:
DEPRECIATION AND AMORTIZATION 64.0 63.9
EQUITY INCOME OF AFFILIATES (1.3) (1.3)
EXTRAORDINARY ITEM 12.3
CHANGES IN OPERATING ASSETS AND LIABILITIES:
ACCOUNTS RECEIVABLE (8.2) 7.3
INVENTORIES (20.0) 8.3
ACCOUNTS PAYABLE AND ACCRUED EXPENSES (7.6) 8.7
INCOME TAXES 24.4 8.3
LONG-TERM SAR ACCRUAL 15.7 21.6
OTHER--NET 11.8 2.6
- - ------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 164.6 176.5
INVESTING ACTIVITIES
PURCHASES OF PROPERTY, PLANT AND EQUIPMENT--NET (74.7) (42.8)
PROCEEDS FROM SALE OF REFURBISHMENT BUSINESS--NET OF TAX 44.9 --
- - ------------------------------------------------------------------------------
NET CASH USED FOR INVESTING ACTIVITIES (29.8) (42.8)
FINANCING ACTIVITIES
ISSUANCE OF LONG-TERM DEBT 262.1 141.2
REPAYMENT OF LONG-TERM DEBT (375.8) (299.6)
PREMIUMS PAID ON EARLY RETIREMENT OF DEBT (13.7) --
- - ------------------------------------------------------------------------------
NET CASH USED FOR FINANCING ACTIVITIES (127.4) (158.4)
- - ------------------------------------------------------------------------------
FOREIGN CURRENCY RATE CHANGES (.3) (1.6)
- - ------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 7.1 (26.3)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 3.0 29.3
- - ------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 10.1 $ 3.0
- - ------------------------------------------------------------------------------
HOWMET CASH FLOW
Howmet net cash flows provided by operating activities for the twelve-month
period were $164.6 million compared to $176.5 million for the prior year.
During the year, inventories increased to meet increased customer demand and
receivables increased as a result of higher sales levels. Net capital
expenditures were $74.7 million in the current year compared to $42.8 million
in the prior year. The increase was due to expenditures for existing equipment
replacement, capacity expansion, and several projects to support new products
and enhanced process capabilities. Net cash used for financing activities
totaled $127.4 million for the current year.
Capital expenditures for the next twelve months, including the large capacity
expansion projects previously discussed, are expected to exceed $100 million.
Estimated future cash flows from operations, current financial resources and
available credit facilities are expected to be adequate to fund Howmet's
anticipated working capital requirements and capital expenditures.
RISK FACTORS
Except for the historical information contained herein, certain statements in
this annual report are "forward-looking statements" as defined in the Private
Securities Litigation Reform Act of 1995. Such
F-44
<PAGE>
statements involve risks and uncertainties, including but not limited to:
changing economic and political conditions in the United States and in other
countries, changes in governmental spending and budgetary policies,
governmental laws and regulations surrounding various matters such as
environmental remediation, contract pricing, international trading
restrictions, outcome of union negotiations, changes in competitive conditions,
customer product acceptance, and continued access to capital markets. All
forecasts and projections in this report are "forward-looking statements," and
are based on management's current expectations of the Company's results, based
on current information available pertaining to the Company and its products
including the aforementioned risk factors. Actual future results and trends may
differ materially from projections made herein as a result of the factors set
forth above and other factors.
DIVIDENDS AND RECENT MARKET PRICES
Adjusting for the two-for-one stock split, dividends paid were $.40 per share
for 1998. Dividends paid in 1997 were $.355 per share and included a $.005 per
share redemption of stockholder's rights and $.34 per share in 1996.
The high and low market prices of Cordant Technologies common stock for fiscal
year 1998 were $55.75 and $33.88 per share, respectively. The principal market
for the Company's common stock is the New York Stock Exchange and prices are
based on the Composite Tape (ticker symbol CDD).
F-45
<PAGE>
SELECTED FINANCIAL DATA
<TABLE>
- - -----------------------------------------------------------------------------------------
<CAPTION>
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA) 1998 /(1)/ 1997 1996 1995 1994
- - -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS
NET SALES BY INDUSTRY SEGMENT
PROPULSION SYSTEMS $ 655.9 $606.1 $651.1 $729.1 $ 868.2
FASTENING SYSTEMS 354.1 284.0 238.4 227.7 175.7
INVESTMENT CASTINGS 769.3
- - -----------------------------------------------------------------------------------------
CONSOLIDATED NET SALES 1,779.3 890.1 889.5 956.8 1,043.9
OPERATING PROFIT (LOSS) BY INDUSTRY
SEGMENT
PROPULSION SYSTEMS /(2)/ $ 78.8 $ 55.1 $ 77.1 $ 25.6 $ 86.8
FASTENING SYSTEMS /(3)/ 51.4 27.0 (6.3) 19.2 16.9
INVESTMENT CASTINGS 104.4
- - -----------------------------------------------------------------------------------------
SEGMENT OPERATING PROFIT 234.6 82.1 70.8 44.8 103.7
INCOME FROM OPERATIONS /(2)//(3)/ 215.9 75.6 61.8 39.4 99.3
EQUITY INCOME OF AFFILIATES 15.6 30.5 4.5
INTEREST INCOME /(4)//(5)/ 10.0 10.9 30.2 46.2 12.9
INTEREST EXPENSE 16.2 1.7 3.9 9.3 14.4
INCOME BEFORE EXTRAORDINARY ITEM
AND CUMULATIVE EFFECT OF
ACCOUNTING CHANGES 126.0 82.4 58.3 52.3 60.3
NET INCOME (LOSS) 118.9 82.4 58.3 47.5 (3.5)
INCOME (LOSS) PER DILUTED SHARE /(6)/
INCOME BEFORE EXTRAORDINARY ITEM
AND CUMULATIVE EFFECT OF
ACCOUNTING CHANGES $ 3.34 $ 2.21 $ 1.57 $ 1.39 $ 1.51
- - -----------------------------------------------------------------------------------------
NET INCOME (LOSS) $ 3.15 $ 2.21 $ 1.57 $ 1.26 $ (.09)
FINANCIAL
TOTAL ASSETS $2,778.3 $854.4 $818.3 $810.7 $ 805.3
WORKING CAPITAL /(7)/ 159.3 172.2 118.7 217.7 216.5
CURRENT RATIO /(7)/ 1.4 2.2 1.7 2.1 2.4
SHORT-TERM AND LONG-TERM DEBT /(7)/ $ 506.2 $ 24.6 $ 65.1 $ 65.4 $ 115.1
DEBT-TO-EQUITY /(7)/ 83.1% 4.7% 14.5% 16.2% 29.9%
STOCKHOLDERS' EQUITY $ 609.5 $521.1 $447.9 $403.8 $ 384.5
STOCKHOLDERS' EQUITY PER SHARE /(6)/ 16.69 14.20 12.29 11.07 10.26
RETURN ON STOCKHOLDERS' EQUITY /(8)/ 24.2% 18.4% 14.4% 13.6% 13.6%
CAPITAL EXPENDITURES $ 72.8 $ 33.1 $ 29.1 $ 33.8 $ 21.2
PROVISION FOR DEPRECIATION 53.9 30.0 33.0 34.5 36.0
CASH DIVIDENDS PAID 14.6 13.2 12.4 12.6 13.3
CASH DIVIDENDS DECLARED PER SHARE /(6)/ .40 .355 .34 .34 .34
GENERAL
AVERAGE NUMBER OF COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING (IN
THOUSANDS) 37,700 37,376 37,132 37,588 39,946
APPROXIMATE NUMBER OF STOCKHOLDERS
OF RECORD /(9)/ 5,200 5,500 6,000 6,500 7,000
APPROXIMATE NUMBER OF EMPLOYEES 17,400 5,300 5,900 7,200 8,000
- - -----------------------------------------------------------------------------------------
</TABLE>
/(1)/Howmet results have been consolidated into the Company's results since
December 2, 1997.
/(2)/Includes pre-tax restructuring charge of $61.4 million in 1995.
/(3)/Includes pre-tax restructuring and inventory charges of $18.1 million in
1996.
/(4)/Includes interest income from an income tax refund of $1.4, $8.7, and $43.5
million in 1998, 1997, and 1995 respectively.
/(5)/Includes $27.5 million of interest income relating to income taxes in 1996.
/(6)/All per share amounts reflect the two-for-one stock split on March 31,
1998.
/(7)/Excludes the Pechiney notes in 1998.
/(8)/Based on income before extraordinary items and accounting change, and
calculated on beginning of year stockholders' equity.
/(9)/As of July 31 of the calendar year.
F-46
<PAGE>
CORDANT TECHNOLOGIES INC. PROXY/VOTING INSTRUCTION CARD
Salt Lake City, Utah
- - -------------------------------------------------------------------------------
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS FOR THE ANNUAL
MEETING ON OCTOBER 22, 1998.
The undersigned hereby appoints EDSEL D. DUNFORD, CHARLES S. LOCKE, and JAMES
R. WILSON, or any of them, each with power of substitution, as proxies to vote
as specified on this card all shares of common stock of Cordant Technologies
Inc. (the "Company") owned of record by the undersigned on September 1, 1998,
at the Company's Annual Meeting of Stockholders on October 22, 1998, and at
any adjournment or postponement thereof. Said proxies are authorized to vote
in their discretion as to any other business which may properly come before
the meeting. IF A VOTE IS NOT SPECIFIED, SAID PROXIES WILL VOTE FOR PROPOSALS
1, 2 AND 3.
Receipt is acknowledged of the Company's Annual Report to Stockholders for the
fiscal year ended June 30, 1998, and notice and Proxy Statement, Audited
Financial Statements and Related Information for the above Annual Meeting.
Nominees for Election as Directors to the Class of Directors whose term
expires with the 2001 Annual Meeting of Stockholders of the Company: Edsel D.
Dunford, Robert H. Jenkins and James R. Wilson.
YOU ARE ENCOURAGED TO SPECIFY YOUR CHOICES BY MARKING THE APPROPRIATE BOXES
(SEE REVERSE SIDE) BUT YOU NEED NOT MARK ANY BOXES IF YOU WISH TO VOTE IN
ACCORDANCE WITH THE BOARD OF DIRECTORS' RECOMMENDATIONS. THE PROXIES CANNOT
VOTE YOUR SHARES UNLESS YOU SIGN AND RETURN THIS CARD.
This card also constitutes voting instructions for Company shares held in its
Employee Savings and Investment Plan.
P R O X Y
<PAGE>
5262
[X] PLEASE MARK YOUR
VOTES AS IN THIS
EXAMPLE.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER HEREIN BY THE
UNDERSIGNED STOCKHOLDER(S). IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED
FOR PROPOSALS 1, 2 AND 3.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR PROPOSALS 1, 2 AND 3.
- - --------------------------------------------------------------------------------
FOR WITHHELD AS TO ALL NOMINEES
1. Election of
Directors. (see [_] [_]
reverse side)
To withhold authority to vote for any nominee(s), mark the "FOR" box and write
the name of each such nominee on line provided below:
- - --------------------------------------------------------------------------------
FOR AGAINST ABSTAIN
2. Proposal to approved amendments to the
Cordant Technologies Inc. Amended and
Restated 1996 Stock Awards Plan. [_] [_] [_]
3. Proposal to ratify appointment of Ernst & Young
LLP as independent auditors for fiscal year
ended December 31, 1998. [_] [_] [_]
NOTE: Please date and sign as name appears hereon. If shares are held jointly or
by two or more persons, each stockholder named should sign. Executors, ad-
ministrators, trustees, etc. should so indicate when signing. If the
signer is a corporation, please sign full corporate name by duly
authorized officer. If a partnership, please sign in partnership name by
authorized person.
- - --------------------------------------------------------------------------------
SIGNATURE(S)
- - --------------------------------------------------------------------------------
DATE
